Thursday 01 Jun 2023
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This article first appeared in Wealth, The Edge Malaysia Weekly on July 25, 2022 - July 31, 2022

Major stock and bond indices have taken a beating year to date as investors fear that interest rate hikes, on the back of fast-rising inflation, are hurting global growth. Market players are debating whether a recession is looming — if not this year, then in 2023.

Local alternative investment platforms, including robo-advisory, peer-to-peer (P2P) financing and equity crowdfunding (ECF), have not been spared from the negative market sentiment. For instance, many portfolios of robo-advisory firms have posted negative returns in the first half of the year, while the overall default rates of P2P investment platforms have crept up. ECF platforms that invest in unlisted companies are shielded by the day-to-day price fluctuation of market prices, but a successful exit within the space could be hard to come by, given the challenging economic environment.

However, some of these alternative platform operators remain confident they can deliver positive returns to investors this year. Wong Wai Ken, country manager of StashAway Malaysia, and Julian Ng, co-founder and CEO of Akru, say investors can expect positive returns over the long term if they stay invested during market downturns via applying the dollar-cost-averaging approach.

Ang Xing Xian, co-founder and CEO of Capital Bay, and Wong Kah Meng, group chief operating officer of Funding Societies, expect to generate returns with mid-to-high single-digit returns this year, as the Malaysian economy is still expected to grow at about 5% in 2022.

Goh Boon Peng, founder and CEO of ECF platform MyStartr, is confident the firm will be able to spot solid businesses that can continue to grow in a challenging market environment, and retail investors should still be able to invest a few thousand ringgit in private markets for potential future returns.

Most robos made losses in 1H2022 as portfolios largely mirror broader market 

StashAway, the first locally licensed robo-advisory firm with the largest assets under management (AUM), had a fantastic ride in 2019 and 2020. Its most aggressive, evergreen portfolio outperformed its benchmark indices — MSCI World Equity Index and FTSE World Government Bond Index — by generating returns of 31.7% and 17.9% respectively.

However, things were looking less rosy in 2021 with the Chinese government’s crackdown on the country’s technology companies. StashAway had invested a relatively significant portion of its portfolio in KraneShares CSI China Internet ETF, a China tech-focused exchange-traded fund. The subsequent Ukraine-Russia conflict made matters worse. 

Last year, while the same portfolio still eked out a 2.7% return, it significantly underperformed its benchmark indices by 24.1% (the benchmark indices were up 26.8%). 

The downtrend has continued this year. As at May 3, that particular portfolio was down 6.1% compared with its benchmark indices, which slid 8.3%. 

Wai Ken of StashAway Malaysia says the current inflationary environment is uncommon and that not many fund managers, especially the younger set, have had the experience of going through one. It is challenging when equities, bonds and gold prices all take a dive. The positive correlation between several asset classes is a headache for fund managers. 

Instead of chasing attractive gains as they did in the past two years, he says investors should change their mindset to preserving wealth. 

“It is obviously very difficult for investors to accept [huge losses], but in a situation like this, it’s about preserving wealth or reducing losses, instead of unrealistically thinking that there will always be gains every year.”

Since last year, some of StashAway’s clients have voiced their frustration, with a few withdrawing their money from the firm. But the amount isn’t much, says Wai Ken. 

He says the outflow of funds from the firm this year is at a low single digit, which is insignificant compared with the two to three months’ withdrawal in 2020 when the Covid-19 pandemic struck. Taking into account the inflows, StashAway still saw a net deposit of funds this year, he adds. 

“Fortunately, many of our clients belong to the mass affluent, who are white-collar professionals in the banking, consulting, oil and gas, and technology industries. They have holding power and are not panic-selling. Some high-net-worth individuals doubled down [on their investments].” 

For Wai Ken, a tougher job is reaching out to new investors and educating them about the importance of consistently investing during market downturns. Most of them do not take a profit when markets are up, but are quick to take losses when prices drop. 

In short, he recommends that investors shore up their emergency savings, given that market players expect a recession next year. Those with sufficient buffers can continue to invest in the down market, or even double down on their investments, if they have strong holding power. 

Ng of Akru says robo-advisory firms are not expected to perform well this year as most are meant to track the performance of major indices.

Investors should not forget the core thinking of passive investing, which is that they cannot predict market movements and are better off tracking broad market indices than outperforming them through active investing. 

“In fact, Akru is mirroring the market by being down year to date,” he says. Based on an internal report posted by Ng on his LinkedIn, the licensed robo-advisory platform’s most aggressive portfolio, P10, generated a return of 31.2% from Aug 28, 2020 (since its inception) to the end of December last year, outperforming 90% of the locally managed unit trust funds that invest globally. 

However, Ng says the P10 portfolio is “sharply down” year to date, in line with the broader market. 

As a proponent of passive investing, he believes investors should continue to invest in the market via the dollar-cost-average approach. “You don’t have to constantly buy and sell to achieve your financial goal. 

“Just imagine you’re buying a property. Like investing in shares, prices can drop 10% or more, or go up. But do you see people buying and selling property frequently? Why do they do that with stocks? You don’t have to trade actively just because it’s convenient to do so,” he points out.

P2P confident of mid-to-high single-digit returns, at least for this year

Spokesmen for two licensed P2P platforms say the returns for their firms should remain steady in 2022, despite a challenging business environment. 

Ang of Capital Bay (CapBay) thinks an 8% net return this year should be attainable. Until today, the platform that focuses on short-term invoice financing notes — typically from one to six months — has had no default cases since its inception in 2017. 

However, investors should note that their real return (investment return minus inflation) will be lower as inflation rises. “The nominal return [our platform provides] should be 8% to 10%. But inflation is also on the rise. And I don’t think we can adjust our rates up by 2% to 3% just like that [if inflation were to rise at those rates].”

Ang also expects the number of investment notes issued by SMEs to remain steady, which means investors will still find ample opportunities to invest in the P2P financing space. 

“We may not see the number of [investment] notes drop. We have definitely tightened our credit recently, with our approval rate [for SMEs that raise funds through our platform] down by 50%. We are rejecting half the deals that came through. However, we are also seeing a lot of demand now. 

“I think net-net, we will still see some growth from here,” he says optimistically. 

Ang points out that the platform is reducing its exposure to specific sectors, such as construction, which have been badly hit by ongoing issues of manpower shortage, supply chain disruption and inflation. “These challenges are very real and significant. We are reducing our exposure to industries that are particularly affected. Even the big names are struggling.” 

Other sectors such as information technology and agriculture are doing well. “Our strategy and [product] mix will change,” he reckons.

Looking beyond 2H2022 to next year, Ang says economic growth is expected to slow down, and default rates for banks and P2P platforms will go up. The easiest way for investors to avoid losses is to diversify their investments. 

“Within CapBay, we try to encourage investors to not invest more than 3% of their funds in any single client. So, when anything happens [such as a recession], their returns would go down from 8% to, let’s say, 3%.

“I would say there is a sufficient buffer [for investors to withstand an economic downturn]. They shouldn’t be too concerned at this moment.”

P2P investors can take comfort in the fact that institutional investors, including asset management firms, are increasingly investing in P2P for higher yields. 

According to Ang, some of the leading P2P platforms have received sums of RM10 million to RM100 million from institutional investors recently. The SC is also looking to allow institutional investors to invest more in P2P financing notes. “It is definitely going mainstream,” he observes. 

Kah Meng of Funding Societies also remains optimistic that it could provide investors with mid-to-high single-digit returns despite market players expecting a global recession this or next year. According to its official website, the platform has a total default rate of 3.27% locally and 1.31% regionally.

When asked if the default numbers posted by P2P platforms are reliable, as most of them are experiencing default rates that are comparable to or lower than traditional banks, Kah Meng says the rates are calculated based on the formula provided by the SC.

He adds that Funding Societies’ numbers are being monitored by the SC and the banks from which the platform borrowed money. “We have to report to the SC, and it has all our data. Even for restructuring, it knows which notes are being restructured and the names of those companies. There is no way we can fudge the numbers.

“We do borrow from banks and institutional investors. On [top of] that, there is a whole bunch of due diligence and monitoring requirements [we have to go through as well].” 

Based on Kah Meng’s observation, there have been no spikes or abrupt changes in the P2P financing industry as at July 13.

Recently, Funding Societies tightened its credit assessment and is now more cautious about funding project-based, big-ticket investment notes such as those issued by businesses in the building industry. 

“We focus more on the wholesale and retail trading businesses, which are generally smaller in size. F&B (food and beverage) businesses are also smaller. They allow us to diversify our notes a lot better.” 

Recently, the platform’s Guaranteed Investment Notes (GIN) have gained good traction. Based on Funding Societies’ website, these are notes that guarantee investors’ principals and returns with an appointed entity’s capital and cash reserve. The appointed entity then charges investors a fee for providing such services. 

“These are lower risk investment notes. I think they’ve been growing quite well. It demonstrates that people are more comfortable with additional credit enhancement, but at the expense of lower returns of about 50 to 100 basis points,” says Kah Meng. 

Deal flows to remain stable despite absence of significant exits, says MyStartr 

Goh of MyStartr says investors can expect more investment opportunities on its platform this year than the last. These are expected to be in the form of SMEs that adopt a B2B (business-to-business) business model instead of a B2C (business-to-consumer) model. 

“Based on our experience, it is harder for companies with a B2B business model to raise funds from retail investors as they feel less relatable. However, there are some B2B companies that we have become interested in recently,” he says.

Despite the ongoing pandemic and challenging economic environment, Goh notices that there are still start-ups and SMEs in various industries that are expanding. Among these are companies in the conventional sectors such as F&B that have performed well after successfully embarking on their digitalisation journey. 

“Many people have the impression that all businesses suffered in the past two years. But that’s only part of the truth. Some did rather well.” 

For instance, RegineHojiak, a company founded by a couple who previously ran a travelling agency, raised RM1.5 million on MyStartr. The company, which manufactures packaged sambal petai (with rapid freezing and vacuum technology) and sambal petai buns, among others, saw an increase in the online sales of its products during the pandemic period. 

“I like the F&B business. It is really one of our specialties with good potential. Many more entrepreneurs have been creating their own food brands through digital channels recently. It is very easy for them to raise funds from retail investors as their products are very relatable to the man in the street.” 

Some might say ECF platforms are meant for technology start-ups and encourage innovation, but Goh sees investment opportunities in other industries. 

“After all, how many good tech start-ups in Malaysia can we invest in? And if there are, the VCs (venture capitalists) and PE (private equity) firms would have snapped up those deals much faster than us,” he says. 

There are about 11,000 ECF investors locally, with around 4,500 registered with MyStartr and most of the rest with pitchIN, the leading ECF platform. ECF platforms other than the two rely more on institutional investors. 

As such, Goh says the ECF investor base remains small. Nevertheless, he thinks there will be growth, even when the macro-economic environment is not looking that great.

He adds that retail investors who chip in RM1,000 to RM10,000 per project are less likely to stop investing in SMEs, as these are relatively small amounts they can part with. “Platforms that rely more heavily on institutional investors could be more affected than us.” 

Goh acknowledges that there has not been any attention-grabbing success story in the ECF space over these past few years. “There have been some exits that generated decent returns,” he says, “but [these] were not significant.”

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