Thursday 28 Mar 2024
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This article first appeared in Capital, The Edge Malaysia Weekly on August 1, 2022 - August 7, 2022

CONSUMERS’ purchasing power is being hurt by high inflation, which could lead to lower investable income. As unit trust funds form the largest component of the Malaysian collective investment scheme industry, we take a look at the potential effect on investments and returns of unit trust funds.

The Federation of Investment Managers Malaysia (FIMM) sees an impact on household income as well as savings and investment ability amid the rising inflation environment. In June, the Consumer Price Index expanded 3.4% year on year, mainly because of the 6.1% rise in food prices.

“As with any inflation, the rise of cost-of-living expenses will naturally erode investor’s investable income in general,” FIMM tells The Edge in an emailed reply.

It is interesting to note, however, that there was little correlation between the returns of unit trusts based on their track records. For example, the annual returns of different asset classes were high (15.61% for equities, 11.74% for mixed assets and 3.81% for bonds) in 2017, despite the 3.7% spike in the inflation rate.

In fact, substantial net inflows into unit trust funds were recorded in 2017, at RM45.16 billion, which lifted the industry’s net asset value (NAV) to RM426.98 billion.

In contrast, when the inflation rate surged to 3.2% in 2014, the returns of equity funds came in lower at 2.32% versus the 0.97% of mixed-asset funds and 4.1% of bond funds. During that year, there were concerns about deteriorating economic conditions in emerging economies and increasing deflationary pressures in the eurozone. Also, there was a sharp decrease in oil prices, which triggered a sell-off in global equity markets.

Having said that, FIMM highlights that it is unable to conclusively say that inflation will not affect annual returns, as the underlying investments are likely to experience higher operational costs and lower profits in the short term which, in turn, may influence their growth potential and market prices.

FIMM, a self-regulatory organisation, advocates the development and growth of the unit trust fund and Private Retirement Schemes (PRS) industry.

Danny Wong, CEO of Areca Capital Sdn Bhd, believes that inflation is not a major factor for investors in the T20 (top 20% income group), who are more concerned about the market outlook than investable income.

“For the M40 (middle 40% income group), however, there could be some impact on their investable amount, as their disposable income will be affected. The concept of long-term investments and saving more during difficult times may not be cultivated among most investors,” he says.

“The M40 needs to allocate money for daily expenses and necessities and fulfil their lifestyle, before allocating money to investments. If this continues, it will affect the inflows into unit trust funds.”

Areca, which manages RM2.7 billion worth of assets, has more than 33 unit trust funds under its umbrella. Wong notes that investors tend to be very cautious during periods of high inflation and rising interest rates.

“Generally, rate hikes are not positive for equities and bonds. The general perception is that the M40’s investments will be much lower when inflation is high.  The T20 will, however, continue to invest. They are the educated ones, so instead of selling their assets, these informed investors are likely to invest more,” he says.

The breakdown of the share of the T20, M40 and B40 groups in the unit trust fund market is not immediately known.

“We do not have data on income groups, as we do not have direct access to the UTMCs’

(unit trust management companies), IUTAs’ (institutional unit trust advisers) or CUTAs’ (corporate unit trust advisers) investors’ private information, such as annual income, for PDPA (Personal Data Protection Act 2010) reasons. We hope to have that data in the future for a more comprehensive demographic picture,” says FIMM.

There has been consistent growth in the NAV of the unit trust fund industry in the past decade, except for 2018, which registered a 0.2% drop, owing to a deterioration in financial markets. Three key developments that year were the escalation of the US-China trade war, pressures on emerging markets arising from a stronger US dollar and an increase in market volatility.

In 2018, the size of Malaysia’s capital market saw a decline to RM3.1 trillion, from RM3.2 trillion in 2017, while the FBM KLCI tumbled 5.9%.

According to the Securities Commission Malaysia Annual Report 2021, the NAV of unit trust funds stood at RM526.89 billion as at Dec 31, 2021 — a 1.42% increase from RM519.53 billion as at Dec 31, 2020. The percentage of the total NAV of the unit trust fund industry against Bursa Malaysia Securities Bhd’s market capitalisation was 29.45%, versus 28.59% a year ago.

During the year, 63 unit trusts were launched while 15 funds were terminated and four reached maturity. This brought the number of unit trust funds offered by the 39 locally incorporated UTMCs to 740.

Last year, there were net outflows of RM1.46 billion from unit trust funds, with the money market and fixed income segments recording net outflows of RM2.04 billion and RM18.43 billion respectively. This was mainly due to the anticipated removal of tax exemption on interest earned by corporate investors, a move that came into effect on Jan 1, 2022.

The unit trust fund industry recorded total gross sales (excluding reinvestment of distribution) of RM404.52 billion in 2021 compared with RM353.36 billion in 2020. The bulk was distributed by UTMCs, with total gross sales of RM240.54 billion.

Wong says withdrawals from unit trust funds are likely to be due to a potential weakness in the market, and not the need to address inflation pressures. “The current high inflation was triggered by supply-demand dynamics, rather than excessive spending and a hot economy. So, it is temporary to the people.”

He says the NAV will only head south in a financial crisis, and stresses that there is no strong indication of a global recession. “Even if there is a US recession, it could be technical, maybe just two quarters, and it doesn’t mean Malaysia will follow suit.

“Most of the emerging markets, especially those in Asia, will still see growth, as the region has not fully reopened borders. Besides that, we don’t see drastic rate hikes. Instead, China is cutting rates to stimulate growth, which augurs well for Asia.”

In terms of asset allocation, he says it should be based on an individual’s profile and investment duration. “The allocation shouldn’t change over the years, maybe just a bit of adjustment and tactical rebalancing, unless it is triggered by fundamental changes such as high recession risks.

“When you first start the investment, you know it will not be a smooth ride over the long term. That’s why there are small adjustments in response to the changes in the market situation.”

According to FIMM’s 2022 Investment Management Survey, initial findings indicate that most investors and UTMCs have a preference for investing in Asia-Pacific, citing growth potential and diversification. Details of the survey are unavailable, however, as FIMM is still compiling information from its members.

 

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