The Malaysian unit trust industry has grown by leaps and bounds in the past decade. But even as the industry thrives, there are systemic issues that need to be addressed.
THE Malaysian unit trust industry is valued at RM326.6 billion today, but it has been a long and winding road getting here. First came the Asian financial crisis in 1997/98, which dented investors’ confidence in the stock market. A decade later, the global financial crisis dealt another blow.
Naturally, the industry suffered from the fallout. By end-2008, net asset values (NAV) had fallen 22%, in tandem with the fall in the valuations of global assets. But the industry recovered and investors gradually returned to the tried-and-tested security of professionally managed assets. The local unit trust industry started to thrive once more.
The industry did not suffer too badly from the financial crisis, says Dinesh Virik, managing director of Novagni Analytics & Advisory Sdn Bhd, which provides fund and investment information, performance analytics and online web tools for intermediaries and investors of Malaysian trust funds, investment-linked funds and private retirement schemes.
In fact, the downtrend in the unit trust industry would have been due to a drop in investment values rather than large-scale redemptions by investors.
“The extent of market losses during the period probably left Asian fund investors resigning themselves to bad luck, with many doing nothing about their fund investments,” Virik says.
In hindsight, however, he thinks the move (not doing anything) may have been a boon if investors had done dollar cost averaging — that is, buying a fixed ringgit amount of a particular investment on a regular schedule, regardless of the share price — as the recovery trend was profitable. Equity funds worldwide, for example, rose 10% to 20% over the next two years.
Nevertheless, even as the industry thrives, there are systemic issues that should be dealt with. For starters, the growing gap between investor knowledge and product innovation. “There is a mismatch of investment preference, a lack of understanding in matching risk with reward,” Virik says.
He asserts that client-centric services or advisory strategies have not kept pace with product solutions. “Consultative strategies, such as investing according to risk tolerance, setting financial or investment goals and monitoring performance, are rarely practised in the Malaysian market. While there is a theoretical acknowledgement of the need for them by product manufacturers and intermediaries, product-driven strategies continue to be at the forefront of the investment recommendation process.”
He sees this “marketing hypocrisy” as a systemic risk and points out that the short-term gains from pushing products will result in a longer-term loss of confidence as less savvy investors who have made losses because of poor advice will not understand the risks implicit in their specific investment strategy and tar the whole unit trust industry with the same brush.
“Much of this syndrome has to do with the traditional one-size-fits-all mentality — where all products fit investors, and no investor segmentation is practised. Methodical advice such as strategic and tactical investment goals is not practised. Single solutions are still the name of the game,” he says.
Another thing that needs to be addressed is standardising the fund fact sheet so that investors know whether they are making money or not. As it stands, many investors are confused when they are given their statements, having to check with an expert to see how their investments have performed.
Virik says no fund manufacturer or intermediary has made peer comparison a requirement. “The reason is pretty obvious, as no fund house would want to make peer comparisons if their funds are poor performers.”
This practice, he points out, makes it difficult for investors to see if they are investing in a good fund. “The lack of support in this area stifles investment knowledge and growth. Investment decisions should be based on better research rather than awards or product advertising.”
With over 40 years of active history, the biggest players still lack the realisation that the unit trust industry is no longer just about selling a fund, Virik says.
“While it is still their bread-and-butter business, their international counterparts have successfully evolved from the traditional push methodology towards client-centric models, the use of technology and empowering investors with investment decision-making processes.”
But the same cannot be said for Malaysia. “Unfortunately, most investors are kept in the dark about their investments today. Most investors carry that ignorance as part and parcel of the investment, but there is a growing community of investors who are yearning for more information. A significant number of retail investors do not even know how much they have made from their funds or portfolio, relying solely on their agents to provide them limited information.”
Clearly, there is still a long way to go. Virik shares with Personal Wealth his thoughts on the local unit trust industry, where it is now and where it should be going. The following is an excerpt from the interview.
Personal Wealth: How has the local unit trust industry evolved over the past 15 years?
Dinesh Virik: In 2000, the FBM KLCI was at 800 points. But today, it is at 1,800 points. From our perspective, this is a normal economic uptrend. The beneficiaries of this uptrend are companies and individuals, in terms of higher profits, better cash reserves, better incomes and salaries. All these lend a strong investment push. The need for investment varies, and can range from short-term investment goals to retirement planning. So in this respect, it is the country’s economic capability that has provided the push for growth.
Obviously, this is enhanced by regulatory and market liberalisation. With better access to global investment knowledge and structures, investors can invest in different kinds of funds and investment products — they have more investment options.
In 2008, unit trust funds fell out of favour as an asset class. Has the industry recovered from that?
Any downtrend affecting the Malaysian unit trust industry during the global financial crisis would be significantly attributed to a drop in investment values, as opposed to large-scale redemptions by investors. The extent of market losses during that period probably left Asian fund investors resigning themselves to bad investment luck, with many doing nothing about their fund investments. In hindsight, the move may have been a strategic boon, especially if they had invested further or dollar cost averaged, as the recovery trend was profitable. For example, equity funds worldwide rose 10% to 20% over the following two years.
From 2008 to December 2014, net asset values (NAV) have grown at a compound annual growth rate (CAGR) of 17.5%, contributed by a growth in the number of funds, as well as further investments by both retail and institutional investors.
This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 25 - 31, 2015.