This article first appeared in Wealth, The Edge Malaysia Weekly on December 25, 2023 - January 7, 2024

In 2023, the investing world saw several key investment trends unfolding. They include the rapid adoption of digital

assets by institutional players, the growing popularity of private credit, the emergence of new retirement solutions and the rise of carbon credit trading.

Changing demographics, technology advancement and the increased focus on sustainability and climate change were among the key drivers of change. In 2024 and beyond, these new trends will continue to drive and reshape investor behaviour.

Tokenisation, underpinned by blockchain technology, has been shaping the future of Singapore’s asset management industry in recent years. In Malaysia, tokenisation is emerging and attracting investor interest.

In simple terms, tokenisation is the issuance of a digital representation of an asset on a blockchain. Interestingly, tokenisation of mutual/unit trust funds opens the door for fund houses to tap into the younger generation market, in which many kick-start their investment journey with digital assets or cryptocurrencies.

In Singapore, through Marketnode, an entity jointly set up by Temasek Holdings Ltd and the Singapore Exchange (SGX), global fund houses are tokenising their funds and enabling investors to trade them conveniently online.

Rehan Ahmed, general manager of Marketnode, envisions that the younger generation who start their investment journey with digital assets will include traditional assets, such as mutual/unit trust funds, bonds or even private equities, in their digital wallets in the future.

“Today, we tend to think about how to bring young people into the world of [traditional] exchanges. But we are not seeing where their eyeballs are, right? I expect that over the next two years, you’ll see a lot more movement on tokenisation, [with the asset management industry] reaching out to a different demographic.”

Rehan touches on the concept of “generational investing”, where industry players ponder on the behaviour of the next generation of investors and how best to engage them.

“Today, digital natives hold large crypto wealth and, frankly, on digital wallets. Imagine an experience in which the same wallet can hold traditional assets, such as funds and bonds,” he says.

Once tokenisation can be done, Rehan adds, the next step is to explore new business models, such as, perhaps, distributing unit trusts through digital wallets.

The digital wallet could function as a new online investment platform, like Instagram to the world of photography, where people globally share their photos on the platform. It could open up a new distribution base.

“On Instagram, people can filter and do all kinds of things, and they become artists and influencers in their own right. Digitalisation compresses the chain between the issuer and the investor … We see traditional financial assets moving in a very similar way.

“The question for us, as someone looking at legacy assets, is how do we take assets in our world and put them into a format that is more attractive to the new [younger] world? This is what I’m excited about in the next five years,” says Rehan.

In an interview with Wealth, Rehan says Singapore’s financial industry embarked on several blockchain projects even before the pandemic. For example, Project Ubin explores the tokenisation of the Singapore dollar, real-time gross settlement and cross border payment.

Industry players set their eyes mostly, however, on money flows, foreign exchange (FX) and clearing. “Very few people were looking at assets. For instance, 40% of Asian bonds are listed in Singapore. We have 1,194 registered fund managers and an AUM (assets under management) of US$3.6 trillion [RM16.9 trillion].

“When you look at it, the opportunity for a neutral infrastructure player to provide asset tokenisation capabilities [to the market] becomes obvious. Many big firms can afford R&D (research and development) on this, but many can’t. So, we want to be that,” he says.

The benefits of tokenising mutual/unit trust funds are manifold. For one, it greatly enhances the efficiency of back-end operational work. An enormous amount of funds flows through the Singapore market every year, requiring significant back-office processing work to be done.

For instance, once an investor places an order with the distributor or transfer agent of a fund, the latter would print out an order confirmation and send it to the fund houses. In some cases, a fax machine is still used for this purpose. Both sides maintain a ledger to record transactions.

“What if the distributor/agent and the fund house can share the same ledger? The velocity of the mutual/unit trust fund market in Singapore is in excess of US$60 billion to US$70 billion a year. And you are tracking all these changes in ownership with a not very shareable, scalable technology,” says Rehan.

In Malaysia, tokenisation will first take place in the private market in the form of initial exchange offerings (IEOs), where blockchain-related start-ups and projects can raise funds through the issuance of digital tokens.

Despite delays, licensed IEO operator PitchIn expects its first IEO tokens to be launched in January or February 2024, according to its head of IEO Nicholas Chong.

Chong acknowledges that the IEO issuer is an auction company. The tokens to be issued are utility tokens, which holders can use to pay for and engage the issuer’s products and services for a discount. Token holders could also be entitled to some privileges.

Explaining the delay, Chong says as IEOs are a new way to raise funds locally, it takes time to educate and prepare issuers for fundraising campaigns.

The platform and its issuers cannot solicit investments before the IEO project is approved by the Securities Commission Malaysia (SC). Both parties have reached out, however, to retail and sophisticated investors to gauge their investment interest.

“We have identified investor groups that are more ready to invest in an IEO. We will work with the issuers to market their campaign plan accordingly once they go live,” Chong says, adding that Malaysia is one of the countries, if not the only one, that have a clear framework for companies to raise funds via utility and security tokens.

“Against this backdrop, PitchIn wants to be the go-to token fundraising partner in Malaysia and, eventually, the region. This means developing a product to help Web3 (blockchain) companies fundraise in a regulatory-compliant way.

“It also means building a bridge for Web2 (the current version of the internet) companies that are keen to explore the new [blockchain] space,” says Chong.

Another licensed IEO operator is Kapital DX Sdn Bhd (KLDX), whose founder and CEO Selvarany Rasiah was chief commercial officer and chief regulatory officer at Bursa Malaysia.

Another major trend that has taken off globally is private credit, where funds are distributed to smaller companies and individuals for a return. It could also be in the form of structured products, such as a fund designed specifically to pool money from sophisticated investors for public-listed entities or their subsidiaries.

A key contributor to the rise of private credit is its higher rates of return, which could range from 7% to 12% a year, without default. The trend has also been fuelled by the increasingly stringent borrowing standards of banks, which has widened the financing gap in the private market.

“Banks are tightening their credit assessment ... They have a lot more lending requirements. That’s what propelled the very rapid growth in the private credit market in recent years,” says Anthony Siau, founding partner of Kairos Capital Group Pte Ltd (Kairos). He adds that such a trend is happening globally, including in Singapore and Malaysia.

Kairos specialises in investing in mid- to late-stage start-ups. Four years ago, it launched its private credit funds to capitalise on the growing trend, which has become particularly huge in the past two years.

Izmir Mujab, CEO and managing director at private equity and financing firm Crewstone International Sdn Bhd (Crewstone), observes the same trend post-pandemic.

“Industry growth accelerated during the pandemic, owing to tightening credit conditions by banks and, more importantly, the ability for private credit funders to serve the developing, yet underserved, markets,” Izmir explains.

Citing a report by Morgan Stanley, he says the size of the private credit market is about US$1.4 trillion in 2023, compared to US$875 billion in 2020. It is estimated to grow to US$2.3 trillion by 2027.

There are several ways in which an investor can gain exposure to the private credit space. Locally, the easiest way is through peer-to-peer (P2P) financing platforms licensed by SC.

Other ways for investors to tap the private credit market is through funds and structured products offered by fund houses and investment firms that cater mostly for sophisticated investors.

Meanwhile, Siau has just launched Kairos’ new private credit fund in Singapore that aims to deliver a 12% annual net return to investors. The fund is expected to be registered and launched in Malaysia next year.

A key to safeguarding investor interest is collateral and tenure. Siau says Kaiors accepts three types of collateral: publicly listed blue-chip shares with ample liquidity; properties in prime locations; and personal guarantees. The money distributed by the firm is collateralised by assets at 1.5 times its amount, in general.

Has there been any default? Siau says the firm has had to deal with only one such case in the past four years. “The borrower couldn’t meet the repayment schedule and asked for an extension, but our investors also needed the money. So, we sold his overseas property (held as collateral) at market price through an agent. We repaid our investors and the rest went back to the borrower,” says Siau.

“To safeguard our investors, we typically request upfront interest payment. For instance, if we distribute to someone RM20 million with an annual interest of 15%, we typically [give] the borrower RM17 million [after deducting the interest]. We keep the balance of RM3 million in an escrow account and pay it out quarterly to investors.”

The tenure of these deals is relatively short, typically ranging from three to 18 months, he adds.

Crewstone’s Izmir says it is important that the investment firm negotiate with the investee companies for a lower/optimal loan-to-value ratio, to account for the potential decline in the collateral’s valuation that could affect capital recovery.

Jason Lee, co-founder of boutique firm Cross Light Capital, says Malaysian investors favour private credit investments as they are not marked-to-market and yields are attractive.

Many individual investors also do not think about investment from a portfolio allocation perspective, which means spreading their bets over various asset classes to achieve an overall decent return over time.

“With a diversified portfolio, you might lose some money in China, for example, and make money from other places. But local investors don’t like to lose money. Private credit funds look attractive to them, as they are not marked-to-market and come with attractive yields. But they should be aware of the risks.”

Heng Wui Leng, co-founder and head of quantitative strategy at Cross Light Capital, agrees. In fact, he recently suffered losses from investing in a private credit fund.

“The thing about private credit is that it is all good — until it is not. They can provide a 10% steady return every year, right? But when something blows up, you basically can take a haircut of 30% to 40% [that could wipe off all your gains or put you in losses].

“The issue is that investors don’t really see what’s the underlying [asset] sometimes. Even if you do, you need to be able to assess the risk. The general advice is don’t put all your money in this space,” he says.

Malaysians may see more retirement solutions entering the market in 2024. In November, SC chairman Datuk Seri Awang Adek Hussin said the regulator was expanding the Private Retirement Scheme (PRS) framework to allow existing providers and digital investment managers (or robo-advisors) to offer algorithm-based PRS to investors. These products will allow investors to make a smaller number of contributions to “pre-approved model retirement portfolios”, he added.

While further details have yet to be announced, CEO of the Private Pension Administrator (PPA) Husaini Hussin says an algo-based PRS could include exchange-traded funds (ETFs) that provide investors with foreign exposure.

In recent months, several fund houses invited unitholders to vote for resolutions that would allow them to distribute income out of capital, instead of realised incomes.

“Previously, income distribution could only be paid out via realised income [under the regulations]. Unrealised gains and accrued interest cannot be distributed.

“But with the change, fund houses can distribute [unrealised gains and accrued interest], which is already captured in the net asset value of the fund price,” says a fund manager, adding that such a change in distribution policy allows fund houses to distribute income via unit trust funds more conveniently.

While the full intention of SC to allow such an amendment is unclear, it could help fund houses design new products. These could be retirement funds that distribute income in a fixed period, such as in each quarter or half year.

Several retirement products were recently launched in the market, including TA Investment Management’s Total Return Income Fund, which allows investors, particularly retirees, to receive income distribution at a fixed rate each quarter. The income could be distributed out of capital gains, dividends or the principal amount.

There are also decumulation funds that come with a regular withdrawal plan. They allow investors to customise their post-retirement cash flow based on their goals and needs. Maybank Asset Management Sdn Bhd and Principal Asset Management Bhd (Principal) are among the fund houses that offer such products.

Another widely discussed topic regarding retirement funds is Account 3, which has yet to be launched by the Employees Provident Fund (EPF). Nurhisham Hussein, its chief strategy officer, said 5% to 10% of a member’s monthly contribution could go into the account.

As a rising tide raises all boats, the environmental, social and governance (ESG) trend has sent the share price of some companies rising, including those in the renewable energy sector.

Carbon credits, however, is an opportunity that investors might have overlooked. Cross Light Capital’s Lee, who held about 3% of carbon credits in his investment portfolio as at November, expects it to be a key long-term asset class for fund managers.

He held about 7% in carbon credits in his portfolio in 2021, when their price more than doubled on the back of the United Nations Climate Change Conference (COP), which gave the world more clarity on how carbon credits could be traded.

Lee, who favours the compliance carbon market, does not invest in the voluntary carbon market (VCM) but trades European Union Allowance (EUA) futures instead.

The compliance carbon market was established based on legally binding emission reduction targets set by national, regional and international agreements, such as the 2015 Paris Agreement.

Under government regulations, companies in specific sectors are required to meet a given carbon emission goal, failure of which results in penalties. Companies that emit carbon in excess of the given target can purchase carbon credits/permits from the government or other firms for offsetting, while those that produce less than the target can sell their credits to those who need them.

Set up in 2005, the European Union (EU) emission trading system (ETS) is the world’s first carbon market and one of the largest today, according to the EU’s official website.

As opposed to the compliance markets, the voluntary market is decentralised, where private actors voluntarily buy and sell carbon credits that represent certified removals of greenhouse gases (GHGs) in the atmosphere. A third-party standard-setter, such as Verra, is usually involved.

Lee favours the compliance carbon market because it is backed and supported by governments. Its supply will only be reduced as governments set lower carbon emission targets each year, while its demand is set to increase. Such an equation will support the long-term price of the asset class.

Hiro Chai, founder and director of Mitsusho Sdn Bhd, agrees with Lee’s view on the long-term positive prospects of carbon credits.

Chai was head of business development and sales at the Bursa Carbon Exchange. By striking out on his own, he aims to provide carbon credits from the international and local markets to local companies and work with parties that want to embark on carbon credit-related projects.

He says the EU has started to cast its net wider by imposing carbon emission targets on more industries. For instance, the maritime sector will be included under the next phase of the EU ETS scheme next year, according to news reports.

The EU has also started to implement the cross-border adjustment mechanism (CBAM), which puts a fair price on the carbon emitted during the production of carbon-intensive goods that are entering the EU.

According to the European Commission’s website, the CBAM will apply only to imports of cement, iron and steel, aluminium, fertilisers, electricity and hydrogens in its transitional phase.

A news report pointed out that the EU had launched the first phase of the world’s first system to impose a carbon emissions tariff on imported steel, cement and other goods starting from Oct 1 this year.

In fact, more countries are laying out their carbon emission policies while others are setting up carbon credit exchanges. Singapore started imposing a carbon tax on corporations from 2019 that applies to all industrial facilities with an annual direct GHG emission of 25,000 tonnes of carbon dioxide equivalent. The tax level was set at S$5 a tonne and will rise to S$25 a tonne next year and S$80 a tonne in 2030.

Several carbon exchanges have been set up in the city state in its efforts to become the carbon services hub in Southeast Asia.

“In Singapore, 5% of its carbon tax can be offset by credits purchased through VCM while you have to pay the rest or invest in decarbonisation efforts,” says Chai.

Indonesia also launched its compliance carbon credit market targeting 99 coal power plants and has launched its VCM, too, adds Chai. “You can call it the compliance market, as there’s a cap [on their carbon emission]. They have to buy allowances for excess emission.”

As for Malaysia, Chai says the government is working with the World Bank and Impact Malaysia on a study on its carbon pricing instrument, which is expected to be completed in 2024.

While the prices of carbon credits, including those in the compliance markets, have fallen and are trading sideways, Chai agrees that their prices can rise as the market continues to develop.

“Awareness is very important. The knowledge level among our publicly listed companies, including those in carbon-intensive sectors, is still lagging. We really need to catch up [with the world] if we want to become a green exporter,” he says.

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