Saturday 13 Apr 2024
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This article first appeared in Wealth, The Edge Malaysia Weekly on December 26, 2022 - January 1, 2023

Asset management firms, big and small, are ramping up their digitalisation efforts. Some are looking forward to working with digital banks next year, while others have invested in or partnered with financial technology (fintech) start-ups to prepare for a more “tech-up” future.

One of the biggest players in town, Principal Asset Management Bhd, is offering its money market fund, known as e-Cash Fund, on the Touch ’n Go (TnG) mobile application while AHAM Capital’s money market and unit trust funds are available through fintech start-up Versa, in which it has a stake.

As for the smaller firms, Areca Capital Sdn Bhd has acquired a minor stake in Versa while Astute Fund Management Bhd (formerly known as Apex Investment Services Bhd) has allied with a new start-up called Cashku to distribute its unit trust funds through a mobile app.

Several factors have contributed to such a trend, but the jury is still out on whether the digital front runners will capture the lion’s share of the market in the next decade.

Clement Chew, CEO of Astute, says the introduction of a clear regulatory framework and the up-and-coming digital banks are two factors that have contributed to the fast-growing tech trend in the asset management industry.

The introduction of the Digital Investment Management framework by the Securities Commission Malaysia (SC) in 2017 has paved the way for the emergence of robo-advisors that help individuals curate portfolios based on their risk appetite and investment horizon, he notes. With a smartphone, the masses can now invest in global markets through exchange-

traded funds (ETFs) from as little as RM10 and with an annual management fee of less than 1%. A total of eight licensed robo-advisory firms have popped up in the past five years, according to the SC’s website.

There is also the e-service licence that allows another breed of fintech start-ups like Versa and TnG to distribute investment products from fund houses through their respective mobile app.

“Without licensing [by the regulators], it would be very difficult for market players to make [technological] progress in such a highly regulated industry,” says Chew.

Another catalyst is the licensing framework for digital banks announced by Bank Negara Malaysia in December 2020. Five licences were awarded in June this year. Several asset management firms are already preparing themselves to work with digital banks to tap into their customer base.

“Essentially, it is to address the market segment which is underserved. They could be individuals with smaller amounts of money to invest, and the more tech-savvy people who want direct [investing] experience,” adds Chew.

It was against this backdrop that Astute started digitalising its back-end system and partnered with Cashku to distribute its funds online to individuals. While the firm initially focused on high-net-worth investors, retail investors can now invest in Astute unit trust funds and those managed by other fund houses through the app from as low as RM10.

The partnership with Cashku was formed based on synergy and a common shareholder, says Chew. “We have to think of new ways to distribute our products as the world becomes more digitalised. Tying up with a start-up is a way to do it.”

Danny Wong, CEO of Areca Capital, says high-net-worth investors have been keen to invest in fintech start-ups in recent years, which has indirectly contributed to the burgeoning tech trend among fund houses.

“Our high-net-worth investors are looking for investment deals beyond the public market. They want alternatives, and fintech start-ups are one of them,” says Wong.

As fund houses such as Areca Capital are increasingly sniffing out private deals for their clients, they sometimes end up investing in fintech start-ups alongside their investors. This was the case when Areca Capital acquired a stake in Versa and DearTime, an insurance technology (insurtech) start-up that offers life insurance policies to the masses through its mobile app at an affordable price. MobyPay, a buy now, pay later (BNPL) start-up, is another investee company of the fund house and its clients.

Internally, Areca Capital’s team of analysts and fund managers is passionate about fintech start-ups, which further encourages the firm to cast its net wider by looking at private firms. With three fintech start-ups under its belt, what is Areca Capital’s end goal? Are these long-term strategic investments to expand the firm’s ability to serve its clients better, or is it aiming to exit those deals at a good price?

Wong wants Areca Capital to become a wealth manager that can fulfil its clients’ various needs, from investments to insurance and even payment solutions. The convergence of these services is happening in the asset management industry because of technology and digitalisation. It is akin to the development of the mobile phone, he continues. “Just like our phones, at first they just allowed you to make calls. Then other functions were added in. It is now like a PDA (personal digital assistant) that helps you do various things like a mini computer.”

Areca Capital is also developing its own robo-advisory platform, but that would take some time to be finalised and rolled out, says Wong.

Is the tipping point coming soon?

On the flip side, there are good reasons why some fund houses are sitting on the fence and continuing to rely more heavily on agents and consultants to distribute their products.

The assets under management of licensed robo-advisory firms are still inconsequential, at just over RM1 billion as at the end of last year, according to the SC’s 2021 Annual Report. By comparison, the total AUM of the overall asset management industry was RM951 billion as at end-2021.

“The numbers show that the combined AUM of all the licensed robo-advisory firms in the past five years represents only 0.1% of the AUM of the overall asset management industry. Five years from today, will the number grow exponentially? Is tech and digitalisation a game changer? I think we have to pay attention to the trend, but the jury is still out,” says Chew.

The Federation of Investment Managers Malaysia, a self-regulatory organisation that governs the marketing and distribution of unit trust funds and private retirement schemes, estimates that the gross sales of unit trust funds done through online channels accounted for about 1.2% of the total gross sales of such funds in 2021, which was not significant.

Jason Lee, co-founder of boutique asset management firm Cross Light Capital, says the wealth technology trend globally, represented mainly by robo-advisory firms in the western countries, has been “rather disappointing” relative to the high expectations back in 2015. Market players were expecting these firms to take the world by storm, which did not happen.

“The largest wealth tech players like Wealthfront in the US and Nutmeg in the UK are barely profitable after so many years,” he says. Wealthfront and Nutmeg are two of the earliest robo-advisory firms in the developed markets.

Thus, Lee believes some fund houses are not feeling the heat to venture aggressively into the digital space as yet. “I think fund houses that are lagging behind in the digital game will lose market share in the next five years or a decade. But my guess is, it will be very slow.”

Devan Linus Rajadurai, co-founder of boutique asset management firm MTC Asset Management, agrees that digital platforms have not taken significant market share from agents and investment consultants in the past five years, based on his observation. It could be the same in the several years to come. He says robo-advisors globally are making some headway in the market by competing with traditional fund houses on cost, which means exempting investors from sales charges and imposing a low annual management fee of below 1%. By comparison, sales charges of unit trust funds could go as high as 5%, with annual management fees at 1% to 2%.

Robo-advisory firms have also won some market share through the launch of promotions and marketing campaigns by burning money or sacrificing their income, which cannot last long, he adds.

“They use their funding to undercut their traditional peers. But this is unsustainable. Perhaps this is why in the US, the big robo-advisors are owned by major banks and brokerage houses [with ample capital to spend and gain market share]. Examples are the robo-advisor under E*TRADE, owned by Morgan Stanley, and the Charles Schwab Intelligence Portfolios. They are also run on a hybrid model, where you still might have an investment advisor who offers advice, but you can execute [your decisions and trades] on the app,” says Devan.

He believes that the agency model, in which fund houses distribute unit trust funds through agents and consultants, will continue to dominate the industry in the coming years. “Investment businesses are still relationship-based in this country. It is not necessarily safer [for fund houses] to go digital.”

Commenting on MTC Asset Management, Devan says the boutique firm does not have any digitalisation plans as it does not think it can compete with the incumbents or foreign fintech players that are entering the country.

A crucial factor for digital investment services to take off is, again, performance, especially for robo-advisory firms that help investors curate portfolios instead of merely distributing existing unit trust funds online, says Cross Light Capital’s Lee.

Lee, who is also a hedge fund manager, says many robo-advisors build and adjust their portfolios based on algorithms that adopt a traditional asset allocation approach. Their performance hinges on the negative correlation between the two main asset classes of equities and bonds, and they strive to deliver good returns to investors by putting more money in bonds when equities are down and vice versa.

However, what if such an approach does not work in a market environment where the prices of equities and bonds increasingly move in lockstep, as witnessed in the past two years? Without human intervention, can the algorithms of robo-advisory firms adapt and react to uncommon and unprecedented market developments? Lee thinks they might not be able to do so.

There is also the issue of interest alignment. Like many other investment funds, robo-advisor firms charge investors a fixed fee, which means their fund managers are not incentivised to generate profit for investors each year.

In contrast, Lee says hedge fund managers like Cross Light Capital charge a performance fee, which means they would only earn money when their investors do.

“If the robo-advisors can address these two problems, then we can expect their market share to increase. Clearly, lower fees coupled with a [nice] digital front end are unlikely to lead to market share losses by the incumbents, given their entrenched market share and large physical distribution agency force,” he says.

On Cross Light Capital, Lee says he has no imminent plans to start a robo-advisory platform or launch a digital app. However, he believes that small firms do have a chance to succeed in the digital space.

“We believe that boutique fund managers have a significant opportunity in the longer term. Although our resources are smaller than that of the larger players, we are nimbler and more dynamic,” he says.

Democratisation is good for consumers, but a volume game for fund houses

The main beneficiary of the tech and digitalisation trend within the investment world are consumers, as they can now put their money to work in markets globally with a fraction of their savings. All they have to do is press a few buttons on their smartphones.

“In the past, if you wanted to see a wealth manager, you would need a larger amount of money, probably RM10,000 or more. Now, fintech apps lower it to RM10. More young people are having access to this kind of service,” says Astute’s Chew.

But is it necessarily good for the fund houses? It is a volume game and depends on whether an industry player can extend its products to the masses quickly and efficiently, he adds.

“You need a lot of volume. A high-net-worth investor might invest RM5 million in you. How many RM100 would you need to hit that amount? This is perhaps why [instead of investing in tech aggressively], asset management firms like us are digitalising our back end and looking for collaborations with start-ups with synergy,” Chew explains.

With their back end digitised, which means having the ability to connect their information technology system with that of a third party, asset management firms like Astute will have the chance to work with digital banks to introduce their products to the masses, says Chew. “Instead of replacing agency distribution with digital ones, I think the digital channel is a plus-one kind of thing for many fund houses.”

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