This article first appeared in Wealth, The Edge Malaysia Weekly on October 26, 2020 - November 1, 2020
The asset management industry has become a major beneficiary of the lower-for-longer interest rate environment amid a slowing global economy. Fund houses are beginning to see a strong inflow of funds and a big jump in assets under management (AUM) as investors shift their money from fixed deposits to other asset classes in search of higher yields and returns.
Teng Chee Wai, managing director of Affin Hwang Asset Management Bhd (AHAM), says the low interest rate environment has been in place for more than a decade, especially in developed economies such as the US, the European Union and Japan. In Malaysia, however, interest rates are now at their lowest, which is part of the government’s measures to mitigate the crippling effects of the Covid-19 pandemic on the economy. And it has caused a remarkable shift in money flowing from fixed deposits into wholesale and retail unit trust funds.
“Malaysia’s interest rate has been relatively high compared with other markets since the 2008 global financial crisis. Ours were even higher than some of our Southeast Asian neighbours, including Thailand. But the pandemic has changed the equation. Bank Negara Malaysia has cut rates in response to an economic recession,” says Teng.
“With interest rates and fixed deposit rates below 2%, it is a shock to many Malaysians,
especially those who rely on their savings and interest income to sustain themselves. They were happy to put their money in fixed deposits when the interest rate was about 4%. But, today, investors asking me whether there is an alternative to invest their savings in.”
Such a shift in fund flows is felt not only by AHAM — one of the largest asset management firms in the country, with about RM67 billion in AUM — but also by smaller firms such as Areca Capital Sdn Bhd and TA Investment Management Bhd (TAIM).
Areca CEO Danny Wong says the firm’s AUM has ballooned 100% year to date to about RM2 billion. “Money is flowing into the industry, as depositors are trying to diversify into other investment instruments. Such a trend started earlier last year, but the pandemic and historically low interest rate environment have accelerated the flows.”
TAIM’s AUM has grown about 72% since the start of the year, says CEO Wong Mien. “It is undeniable that the currently low interest rate has resulted in unprecedented levels of liquidity seeking higher returns. While the pandemic has wreaked havoc on the global economy, this once-in-a-decade crisis, if not entirely expected, has been a boost for asset management firms.”
According to AHAM’s Teng, asset management firms that offer fixed-income funds, which are essentially bond funds, are the main beneficiaries of the low interest rate environment. Investors are flocking to these funds in search of higher yields and stable income streams.
“You can see massive inflows into fixed-income funds. It is happening across the industry. Our fixed-income funds and those of our peers are experiencing a big jump in growth,” he says.
As at Sept 30, the Affin Hwang Aiiman Income Plus Fund and Affin Hwang Bond Fund, which invest in the local bond market, had received a net inflow of RM920 million and RM559 million respectively year to date. Investors have also poured RM758 million into Affin Hwang Select Bond Fund, which invests in Asia ex-Japan bonds.
The three funds alone garnered about RM2.2 billion over the past nine months. “We are clearly seeing a big trend in the local fixed-income market,” says Teng.
The situation is slightly different when it comes to equity funds. Investors are generous only in putting their money in thematic funds that invest in specific sectors, typically the technology sector, he says.
“We have seen a fair bit of traction in thematic funds on the equity side, in particular technology. From a valuation standpoint, tech stocks are not cheap. But these will continue to gain traction in the many years to come. We have no doubt about it,” says Teng.
“Very soon, the world will be talking more about e-commerce, cloud computing, autonomous driving and other technologies. Companies involved in these areas can grow despite the ongoing pandemic. And they are expected to grow their business at 20% to 40% a year over the next three to four years.
“Even though their PER (price-to-earnings ratio) is at 30 to 40 times, how many companies in the world will be able to exhibit such growth over the next three to four years? There are very few.”
Areca’s Danny concurs. He says investors are looking to put their money in companies involved in the technology sector, as they believe the pandemic is accelerating the pace of technology adoption globally.
On Sept 30, the firm introduced its Dragon Technology Fund, which invests in technology-related companies in Asia. In just two weeks, the fund has attracted RM60 million in investors’ money.
Managed internally by Areca, it is a wholesale fund accessible only to sophisticated investors. The minimum investment amount is RM50,000, and there are a sales charge of up to 3% and an annual management fee of 2%.
As at Oct 15, the fund had invested in 10 technology-related companies in China. They include Semiconductor Manufacturing International Corp (SMIC), the largest semiconductor foundry company in China, and Hua Hong Semiconductor Ltd, another semiconductor foundry company that focuses on areas such as embedded non-volatile memory, power discrete, and analogue and power management.
Familiar names that the fund has invested in include Alibaba Group Holding Ltd, Tencent Holdings Ltd, Xiaomi Corp, JD.com Inc and Meituan-Dianping. It also plans to invest in the Ant Group, which has obtained dual-listing approval in Hong Kong and Shanghai.
According to Areca’s Danny, investors are looking to invest their money more tactically over the short term because they see value emerging in specific stocks listed in foreign markets. “As stock prices across the globe have been battered by the ongoing pandemic, investors see value in them and want to diversify their money away from the local market. They want to invest overseas tactically without taking on too much risk,” he notes.
Singapore’s banking sector fits such a requirement, Danny opines. For instance, Oversea-Chinese Banking Corp Ltd (OCBC) has seen its stock price plunge more than 20% to about S$8.70 currently from S$11 at the beginning of the year. This is despite its strong fundamentals and status as one of the highest-quality banks in the world. “A rebound in the stock prices of Singapore banks will provide investors with attractive returns over the shorter term,” he adds.
It was against this backdrop that Areca launched its Focus Leverage Fund, which invests in Singapore banking stocks with a 12-month horizon. The fund, launched in June, has drawn RM60 million in just a few months, according to Danny. The minimum investment amount is RM50,000, there are a sales charge of up to 3% and an annual management fee of 2% for the wholesale fund.
“We believe that some of the Singapore banks are oversold, and their prices will rebound when the pandemic and global economy improve. We are expecting prices to climb back to their previous levels in the next 12 months,” he says.
Danny points out that the fund is structured to hedge currency risk between the ringgit and Singapore dollar. He explains that the term “leveraged” means the fund uses investors’ money to purchase Malaysian Government Securities (MGS) and pledge these securities to the banks for a Singapore dollar loan. The fund manager then invests the loan in the Singapore market. This strategy allows investors to hedge their currency risk.
Meanwhile, TAIM’s Mien says the firm’s All China Equity Fund saw an encouraging increase in investor interest, owing most probably to the country’s containment of the Covid-19 outbreak. The firm’s Gold and Silver Fund, which serves as an investment instrument to hedge against macroeconomic risks, also saw encouraging inflows. “Our Flexible Asian Bond Fund and Dana Afif, which is a sukuk fund, also saw increased interest amid a low interest rate environment,” he adds.
Fund houses are expected to allow clients to invest in fixed-income funds in currencies other than the ringgit. They are also likely to introduce more thematic funds that focus on specific sectors rather than geographical locations.
AHAM’s Teng says investors are increasingly looking to invest in foreign currencies for various purposes, including their children’s education. The most sought-after ones are the renminbi as well as the Singapore, US and Australian dollars. “We are still in the planning stage to offer these options to investors,” he adds.
From an investment perspective, Teng has a positive view on the renminbi as China continues to grow politically and economically. “I think the renminbi will be the currency of the future. It may not replace the US dollar in the next 20 to 30 years, but its usage could widen. And it could challenge the position of the US dollar. I think there will be a lot more demand for the renminbi from Malaysians,” he says.
On the equity side, Teng says fund houses will be launching more thematic funds. Geography-focused funds have become less attractive, as major stock indices in many countries have been in the red since the Covid-19 outbreak.
“Similarly, if you look at the indices that have performed well and you strip out some companies from them, they do not look as rosy as they seem to be. This is a year of two halves. It is either you have it [companies in outperforming sectors] or you don’t. And if you don’t, your returns look horrible,” he says.
The Malaysian market seems to look less attractive to investors during this period, says Teng. This is despite some outsourced semiconductor assembly and test (OSAT) companies that are expected to benefit from the rollout of 5G and other technology trends.
“Unfortunately, these companies are not part of the FBM KLCI. People don’t feel the excitement. But if you look at the performance of their stock prices, they are phenomenal,” he says.
“In general, Malaysia is expected to struggle with economic growth over the next two years. And the market seems to be tilted towards the direction [of investing in overseas companies]. The US and China are the two key markets that investors are focusing on.”
Asset management firms are increasingly investing in technological capabilities to conduct investment research as well as engage with and service clients more efficiently. The ongoing pandemic has accelerated such a process, according to industry players.
Apex Investment Services Bhd CEO Clement Chew says this may be a watershed year as fund houses change the way they operate. “We are doing more things online, from investment research to disseminating information, organising conference calls and holding investment briefing sessions. We are investing in our online platform to make it easier for investors to buy and sell unit trust funds.”
Areca Capital Sdn Bhd CEO Danny Wong concurs. He says the firm has developed its online platform to onboard clients without filling in physical forms, as well as to invest and withdraw money online. “Our clients can receive their investment account statements online, which will tell them about the funds they have invested in and how these funds have performed.”
Teng Chee Wai, managing director of Affin Hwang Asset Management Bhd (AHAM), says the firm has continuously invested in technology to improve productivity and efficiency. “We have been investing in technology over the past three years. I think fund houses need to continue investing more in technology. Unlike other financial institutions such as banks, the asset management industry has not been doing it enough.”
Like Areca, the firm has invested in technology to onboard customers and let them invest and withdraw money online, he says. Doing so would allow the firm to lower its operating cost over the long term.
AHAM is investing in its back-end systems to prepare for partnerships with financial technology (fintech) start-ups. For instance, it can now exchange various information with third parties through its application programming interface (API). Doing so allows the firm to distribute its products seamlessly through the mobile application of its partner. This is how AHAM came to partner Versa Asia Sdn Bhd, a fintech start-up that will allow consumers to spend and invest their money through a mobile app.
“We are exploring new ways to market our products and sell them to a new group of investors, especially the younger ones who like to do things online,” says Teng. “Partnering third parties, including fintech start-ups, is a space that we are exploring. We don’t have a fixed mindset about how we will do this.
“I told my team that I am open to working with platform players who can add value to us. And we are also prepared to see how we can help them develop their business.
“It is good to partner third parties in this segment, instead of doing it in-house. They are nimbler and more creative than us. They can reach out to the market faster than we can.”
The big technology disruptors to the asset management industry, however, are artificial intelligence (AI) and machine learning. Fund managers could be replaced by supercomputers that can make investment decisions by analysing big data.
“I sent my team to New York three years ago to attend a conference on such a topic. My guys came back and told me that Malaysia does not have enough data to implement it. The only two countries that have sufficient data to predict consumer behaviour, trends and patterns are China and the US,” says Teng.
“However, it is something that we will always think about. I have often asked myself, ‘At what point will fund managers become dinosaurs?’ We are keeping an eye on it.”
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