Phenomenal Growth Underpinned by Rising Incomes and Demographics
A rapidly growing economy, high incomes and an increasing number of young people entering the workforce has led to an explosive growth in assets under management (AUM) in Malaysia. The Employees Provident Fund (EPF) – among the world’s largest retirement funds – and Private Retirement Schemes (PRS) have provided impetus to asset management.
In a bid to preserve the quality of their lifestyle, increasingly more Malaysians are planning ahead by opting for PRS as an addition to EPF due to higher returns, depending on one’s risk appetite. The total net asset value (NAV) of PRS in Malaysia made up a total of RM1.2 billion as at 31st December 2015 and is set to expand rapidly.
Over the last five years to end-2015, AUM in Malaysia has shown a phenomenal compounded annual growth rate (CAGR) of 12.1%, underpinned by the growth in the unit trust industry where the NAV rose 12% over the last 11 years. Within this, Islamic unit trust NAV over the last 11 years showed a higher CAGR of 18%, reflecting the increased demand of Islamic compliant products.
As at end-2015, AUM in Malaysia amounted to RM668 billion, with unit trusts accounting for 52%, or nearly RM350 billion, while Islamic assets accounted for a fifth, or RM134 billion, increasing from a share of 13% five years ago. The Malaysian unit trust industry is ranked sixth in Asia.
The EPF contributes to some 15% of AUM as it outsources a portion of its fund management activities. The biggest funds in Malaysia are managed by the EPF with total investment assets as at end-2015 of RM685 billion, up 7.5% from a year ago. EPF’s funds are set to grow strongly with annual contributions of RM60 billion in 2015.
A forte of Malaysia’s market lies in its Islamic capital market product offerings, with Shariah-compliant instruments accounting for RM1.7 trillion, or 60% of the Malaysian capital market. In terms of Islamic AUM, as at end-March 2016, Malaysia is a global leader with a 35% market share of global Islamic AUM totalling US$62 billion.
Capital Markets Malaysia (CMM) encourages Malaysia-based fund managers to secure more international mandates, and the large international fund managers to originate their back and middle office functions in Malaysia.
Since 2005, key international players that have set up their Islamic hub in Malaysia include Aberdeen Asset Management, Amundi Malaysia, BNP Paribas Asset Management, Goldman Sachs, Franklin Templeton Investments, Nomura Asset Management and Threadneedle Investments.
Availability of Expertise, Liberalised Regulations
Additionally, Malaysia benefits from having international fund management expertise due to key international players having chosen the country as a global Islamic hub for their asset management operations.
In response to the more dynamic market, the industry regulator, the Securities Commission Malaysia (SC), has rationalised existing regulations by liberalising the wholesale framework and rules to establish boutique fund management companies. This includes the Lodge and Launch (Lola) framework introduced last year in 2015, with the intention to shorten the time-to-market by enabling wholesale products to be launched once the required information is lodged via an online submission system.
AUM is projected to grow to RM1.6 trillion in 2020. With its many advantages, including its geographical location being in the centre of the high-growth ASEAN market, a growing pool of skilled talent and professional and legal services, Malaysia is well-placed as a regional player for fund management.
There are significant opportunities within the industry as the unit trust penetration rate (measured in terms of unit trust NAV as a percentage of the stock market capitalisation) is expected to increase to 34% by 2020 from 21% as at 31st July 2016 due to the growing middle-class population, which will lead to a higher propensity to save and invest for the future.
The development of the unit trust industry has been aided by several factors, including regulatory enhancements that have facilitated product expansion, strengthened investor safeguards, improved time-to-market efficiencies and the expansion of distribution channels. Unit trust funds can adopt multi-class structures that enable them to be tailored to meet the needs of different investors.
A Stabilising Factor for the Capital Markets
One of the key characteristics of the Malaysian capital market is the presence of a large domestic fund management industry which invests much of its money within the country.
There are two major implications for capital market participants from this characteristic. First, the volatility of capital markets is reduced because the presence of domestic funds tends to smooth over fluctuations in values caused by the periodic movement of foreign funds in and out of the markets.
Second, the huge and growing size of the domestic fund management industry - basically caused by increasing demand for investment products resulting from rapid economic growth, higher income rates and a high saving rate - will provide opportunities for funds who may want to set up operations here.
The growth in the industry is underpinned by a healthy real GDP growth rate for an advanced emerging market of over 4% a year in the last five years, rising income levels and a young population with a high proportion of people entering the workforce. It has led to a sustained increase in the demand for long-term investment products.
While this is currently seen in an increased demand for unit trusts, there is likely to be greater demand for products such as exchange traded funds (ETFs) in future. These will offer lower entry and exit costs for investors, and allow them to invest in and diversify their holdings without having to constantly monitor them.