This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 14 - June 20, 2016.
Smaller fund management companies are finding it tough in the current investing landscape. To compete with their larger peers, they have introduced a range of innovative products and tailored approaches — all for the benefit of investors.
Higher returns and more transparent access
The personalised services offered by smaller asset management firms to the emerging affluent group can be seen in the way Malayan Traders Capital approach potential investors. Its founder and chief investment officer Devan Linus Rajadurai says he and his partners, who are the firm’s fund managers, meet investors personally instead of selling their fund through agents who may not understand the firm’s investment philosophy and fund performance.
Devan says there are some “super agents” in the market who not only sell unit trust funds but also properties and gold schemes. He is critical of this approach and strongly opposes the selling of funds and investment products through such agents.
“These so-called super agents sell all kinds of products without having much knowledge about them. Instead of explaining the investment philosophy and fund performance to investors, they sell products based on their relationship with these investors,” he says.
On the other hand, Devan and his partners prefer to meet up with potential investors personally to tell them about their fund’s performance and the factors that contributed to it. They also ensure that these investors know who they are investing with and how their money will be managed. As a result, their clients enjoy higher transparency and greater access to information.
At the end of the day, performance is key, says Devan. The only fund managed by the firm — the Absolute Return Fund, which is domiciled in the Cayman Islands — has generated a return of 44.4% (as at March 31) since its inception in July 2012. The fund carries a 1% management fee and a 20% performance fee above the high water mark of its net asset value. It does not charge a sales fee and the minimum investment amount is RM500,000. Malayan Traders Capital had more than RM100 million under management as at May 31.
Devan says smaller asset management firms usually manage a limited number of funds and their partners and fund managers put their own money in them. These owner-managed funds, he adds, tend to outperform most of the plain vanilla funds introduced by bigger asset management firms as they have “more skin in the game”.
Devan believes that wealthy investors (including the emerging affluent group) will see more alternative investment choices going forward. This is because the Securities Commission Malaysia (SC) has made progressive steps in recent years for niche fund managers to be licensed as boutique fund managers, and that these firms will offer investors more alternative investment products. For instance, Malayan Traders Capital employs leverage in the form of low-interest US or Singapore dollar-denominated loans to invest in companies to enhance returns.
In July last year, the SC relaxed its rules by allowing boutique firms with a paid-up capital of RM500,000 to be licensed. This compares with the RM2 million required for a full-fledged fund management company. Malayan Traders Capital was a beneficiary of this move.
Compliance and risk management costs putting pressure on smaller firms
The innovative products offered by smaller asset management firms are driven by the challenging economic environment and changing needs of investors. Unlike the larger bank-backed asset management companies, these firms — with their limited capital and clients — have to find ways to cope with the rising operating costs and growing investor demand.
Areca Capital Sdn Bhd, with more than RM700 million under management (as at May 31), is one example. “Our firm used to have a profit margin of 20% to 30% in the past five years. Today, it is near single digit. If you have 5%, you are lucky,” says CEO Danny Wong.
Meanwhile, Libra Invest Bhd has seen its profit margin drop to between 5% and 10% today, compared with just under 20% in the past five years, says CEO Jason Lee.
The global economy has been on a roller-coaster ride in the past two years following the China stock market rout and plunging commodity prices. Like many global funds, some of the smaller asset management firms have been impacted by the turmoil in the stock markets, says Lee.
He says the firm’s local retail funds posted negative returns last year, while its private mandate has seen an average return of about 8%, which is lower than the returns seen in 2013 and 2014. “We have certainly seen diminishing returns in the past two years. While our private mandate has performed fairly well, our returns depend on the performance fee we charge our clients. The threshold for us to get the performance fee is a return of more than 10%,” he adds.
“We charge a 20% [profit-sharing] fee in excess of the 10% return. Our private mandate account has generally generated a return of 8%, while some accounts come in at 9.99%. We should make a little bit more.”
Wong says rising inflation owing to the implementation of the Goods and Services Tax, the removal of government subsidies and weakening ringgit have made it harder for smaller asset management firms to survive. Operating costs have also increased substantially over the years.
“In my view, such firms will not survive in the next three to five years if they do not change. The firms must change unless their assets under management are growing faster than their costs. But looking at the trend, the requirements on the costing side, especially the compliance side, will keep on increasing. This is not only happening in the asset management industry but also across the SME [small and medium enterprise] space,” he says.
Apart from macroeconomic factors, many of the smaller asset management firms have been feeling the pinch due to stricter compliance requirements under the Anti-Money Laundering Act (AMLA), says Wong. The Act was introduced by Bank Negara Malaysia in 2012 to curb unethical practices and illegal money flows, which have increased since the global financial crisis in 2008. As a result, asset management firms have had to implement stricter compliance measures.
“The quantitative easing programmes introduced by central banks globally began after the subprime crisis. They started to print a lot of money to [revive their economies]. But it also promoted unethical practices and caused leakages [in the financial system],” says Wong.
While the higher liquidity in the market resulted in growing business for asset management firms, it also gave rise to fraud cases. “This led to the introduction of AMLA and other tighter regulations, which got fund houses to beef up their risk management processes to ensure that their investors and money are clean,” says Wong.
“The costs on the risk management side have increased 100% [for Areca]. Previously, firms such as ours would only need one or two personnel in charge of risk management. Now, we need three persons or more.”
Lee concurs that the cost of compliance and risk management has increased, putting pressure on smaller asset management firms. Libra Invest has two full-time risk management officers and is looking at recruiting one more. This will cost the firm another RM8,000 to RM10,000 a month. “It is a lot from the cost perspective, but it is something that cannot be avoided,” he says.
Lee says the challenges in risk management are amplified by the fact that it is very hard to recruit good and experienced compliance officers as the foreign banks and larger asset management companies already employ most of them. “It is hard to find an experienced officer. An alternative is to buy a compliance system module to monitor your trades and portfolios, but it also comes with higher costs,” he adds. Libra Invest had RM5.52 billion under management as at May 31.
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