Mr Ho Kay Tat, Editor-in-Chief, The Edge Malaysia
Mr Simon Soo Hu, Senior Company Officer, Thomson Reuters Malaysia
Dato Yusli Mohd Yusuf, CEO Bursa Malaysia
Mr Lee Siew Hoong, Executive Director, FIMM
Distinguished guests,
Ladies and gentlemen
Good morning
- First of all, I would like to thank the organiser for inviting me to deliver this keynote address. The Edge-Lipper-StarMine Awards is a significant event as it plays an important role in recognising the “best in its class” and in rewarding industry excellence. It gives me great pleasure therefore to be here to acknowledge the recipients of these awards who were the best performers amongst the Malaysian unit trust managers, brokers and research analysts in 2009.
- In Malaysia, unit trusts have been the vanguard of collective investment schemes (CIS), although other forms of CIS such REITs and ETFs have emerged over the last few years.
Industry performance
- The SC has always viewed collective investment schemes as a vital segment of our financial services industry. Collective investment schemes allow small investors to pool their money together to participate in opportunities that they otherwise would not have access to and achieve diversification with the benefit of professional investment skills. Indeed, various initiatives were introduced under our Capital Market Masterplan to help develop the unit trust industry, including removing restrictions on unit trusts participating in exchange traded derivatives, allowing greater international diversification and allowing foreign majority ownership of UTMCs.
- In December 1993, we had 43 funds with a total NAV of RM28.1 billion. As at the end of last year the industry had grown to:
541 funds with a total NAV of RM191.7 billion
The NAV makes up 19.18% of the capitalisation of our stock market
We have 14 million account holders in a variety of fund categories
And 201 funds with exposure to foreign investments representing 10.17% of total industry NAV
Net sales of RM24.8 billion for the industry in 2009, represents an amount close to the entire NAV of the industry as at December 31, 1993.
- By all accounts, our unit trust industry has done extremely well and I must commend the UTMCs for this success. You have developed and built a vital segment of our capital market that serves people from all walks of life. The challenge now is to sustain this performance and to develop the depth and breadth of the industry. Supporting this effort is high on the SC’s agenda.
Value propositions and market development
- Several themes seem to emerge quite naturally around the challenges before us. Thus the SC’s initiatives will manifest itself in two forms. The first is to provide confidence to investors that their investments will receive an appropriate level of protection and oversight. The second is to provide a facilitative regulatory framework for unit trust funds to operate in.
- The success of UTMCs can be attributed to the twin drivers of providing value to investors and meeting their investment preferences. There is a need to continuously review the value chain to ensure that the industry remains competitive. This, of course, means taking a good hard look at costs and service propositions throughout the value chain – from the sales agents through to the investment managers and trustees.
- Fees charged to investors need to be reasonable and commensurate with the value that investors receive. Investors frequently ask whether they need to be paying such fees. In this regard high front end fees need to be rethought and recalibrated to justify the value add, whilst maintaining a competitive edge. As a regulator, our philosophy is to leave the pricing of services to market forces. However, when there is a disconnect between the value of services offered and the price of those services, there would be a need to provide the investor with protection. There is a strong preference on our part however not to have to intervene with respect to fees and as such, we urge service providers to ensure that the fees they charge are competitive and reasonable.
- Investors are becoming more aware of the effects of fees on their long-term returns and we believe that the market is ready for new fee configurations that more appropriately match service levels, resource capacity, quality and performance. The SC is open to such propositions. We have, in fact, approved funds with low front loads and low annual management fees that are compensated with performance fees and also where the absence of upfront fees is compensated with higher annual fees. Our key criterion in allowing such configurations is fairness to the investor.
- The industry must also continue working towards expanding the range of products and markets. Malaysia has a competitive advantage as an Islamic Capital Market hub and today has 144 Shariah-compliant unit trust funds. As part of our efforts to facilitate market expansion for the industry, we had as a start, inked the Mutual Recognition Agreement with the Dubai Financial Services Authority and another, more recently, with the Hong Kong SFC to enable cross-border distribution of Islamic funds on a bilateral basis.
- Our unit trust intermediaries have become one of the best in the region and are well- positioned to play a significant role in the regional arena. The industry must now rise to the challenge of broadening our connectivity with other markets and to increase its competitiveness on an international level, taking advantage of the facilitative regulatory framework that has been established. I applaud the innovation which some UTMCs have shown in developing new investment options for their investors, in terms of risk-reward structures as well as geographical exposure. Indeed, the range of investment avenues available through unit trust funds today helps address investors’ differing objectives and needs.
- The unit trust industry must also increase its efforts to broaden distribution channels and reach – both domestically and internationally. Relying solely on traditional channels and existing distribution structures and approaches is simply not a sustainable solution. Excellence in distribution capabilities is key to any industry that seeks to be internationally competitive. Internet broking, lower investment entry points to participate in equity markets, easier access to global markets and alternative investment products all threaten the status quo of the industry. At the same time, it would be worthwhile for the industry to also critically examine whether there is a need to focus on size, to benefit from economies of scale, given that close to half the unit trust funds today have NAVs of RM50 million and below. The industry will have to compete for a share of investors’ wallet and will benefit from finding better ways of doing things and passing on the cost savings to investors.
Meeting investor needs through innovation
- Innovation can extend not only to product features but also right across to fees and service levels. More competitive choices can be provided through mass customisation where a single fund can provide a menu of options to investors on key investment preferences such as fees and currency of investment within a common investment portfolio and mandate. Indeed, several UTMCs have expressed to us their readiness to take up this challenge, showing the willingness and ability of the industry to continuously step up its efforts.
- On this note, I am pleased to announce that the SC will be making amendments to the Guidelines on Unit Trust Funds very soon to facilitate a multi-class structure for unit trust funds. With these amendments, a single unit trust fund will be able to offer multiple classes of units over a single investment pool, with each class of units having different features, such as the fees and charges imposed and the currency in which it is denominated.
- For example, investors will be able to choose whether they prefer paying an upfront fee with lower annual fees or higher annual fees in lieu of an upfront fee. This enables better matching of the investment preferences for different investor groups, with the currency option facilitating the marketing of our unit trusts to foreign investors who can also invest directly into a unit trust fund in their own currency instead of having to convert their investment sum into ringgit. The same goes for local investors who want foreign exposure.
Higher standards for sales conduct and disclosures
- The increasing level of product sophistication and distribution choices being offered by the industry needs to be matched by higher standards of sales conduct and disclosure. The SC continuously reviews its guidelines based on the feedback received from various stakeholders as well as our observations of international developments.
- The global financial crisis clearly demonstrated the need for responsible selling; particularly in relation to the level of understanding that sales representatives have of their own investment products. It is imperative that intermediaries invest in training their sales personnel – particularly when they are marketing sophisticated products to investors. Apart from knowing what they are selling, it is important that sales personnel and financial advisers undertake the appropriate due diligence to ensure investor suitability for the various products they are marketing. As part of responsible selling, the industry must adopt the triple precepts of “knowing your client”, “knowing your products” as well as “knowing how to make the right disclosures”.
- The standard of disclosure remains one that the industry needs to revisit urgently. Disclosures happen at two critical points – through the offering document and at the point of sale. It is our intention to migrate towards a full post-vetting regime for offering documents to further promote efficiency and competitiveness. However, we continue to see lapses in the standards of disclosure in such documents, resulting in pre-approval reviews that are longer than should be needed. In transitioning to a full-fledged post vetting regime, we will be implementing a tiered system for approving applications to establish funds. UTMCs will be tiered based on the quality of their applications (which include disclosures in their offer documents) with those at the upper most tier being subject to post vetting (and hence faster approvals) and those at the lower tiers being subject to different degrees of pre-approval review. The tiering system will reward UTMCs who have been consistently responsible and diligent in the offering process. Concise, easy to read Key Product Statements are expected to be introduced in the near future as an integral offering document.
- We expect disclosures at the point of sale to be complete and concise. As such, sales personnel must communicate all the information necessary for the particular investor they are engaging, to make an informed decision in a manner that the investor is capable of understanding.
- Sometimes, inappropriate selling practices or conduct arise because there is misalignment of incentives. When sales personnel are incentivised to sell products based purely on commissions, it is likely that they would go all out to push the products with the highest commissions. This is where governance must come in to align incentive structures with fair treatment of customers. The industry needs to review how sales personnel are remunerated and how to realign incentive systems to win customer confidence and loyalty.
The importance of investor education
- Investors are more predisposed to investing in what they understand. As such, the industry association and the Securities Industry Development Corporation have worked towards educating investors on the benefits and associated risks of investing in unit trusts and these initiatives have generally had a positive impact on industry growth.
- Recently, the SC embarked on a joint effort with FIMM to ensure that investors are fully aware of critical issues when they make an investment. The introduction of an “Investor Alert Form” that highlights risks, fees payable under different sales avenues and the investor’s right to a cooling off period that needs to be acknowledged by both the sales person and the investor will help ensure that investors invest with their eyes open. FIMM will be auditing completed forms to ensure that they are not signed off blindly. I am indeed pleased with how the industry is working together with the SC for the benefit of investors and the development of the industry.
UTMCs and corporate governance
- As shareholders, UTs – through their UTMCs – can play a meaningful role in promoting corporate governance in the companies that they invest in. As investment managers, UTMCs should always act in the best interests of the funds that they manage and need to consider when they should step in to protect and enhance the value of their investments. As such, UTMCs need to consider when and how they should exercise the rights of the shares held by the unit trust funds that they manage. A policy should be developed and applied consistently.
- As a matter of good practice, UTMCs should also inform potential investors of their stance on dealing with corporate governance matters and provide to investors, as part of their periodic reporting, information of corporate governance initiatives and actions that they have taken.
Conclusion
- In conclusion, I am delighted to see the considerable success that the Malaysian unit trust industry has enjoyed and I am confident that the industry will continue to develop to meet the evolving financial needs of investors. The industry continues to contribute significantly to the development of our capital market by helping build the demand side and plays an important role in channelling capital into the real economy. Unit trusts also continue to remain a simple, efficient way for the man in the street to invest, a contribution that should not be underestimated. I hope the recognition given to high achievers will help stimulate greater competition among unit trust managers to create a more dynamic environment and contribute to towards sustained industry growth.
- Please join me in congratulating the award recipients – the unit trust managers, the brokers and the research analysts. Thank you.
