Published in Asia Asset Management August 2007
Riding on the back of an excellent local reception, offshore funds are expected to be the main driver of growth for Malaysia’s fund management industry. “The take-up rate for offshore funds has been fantastic,” declared Paul Khoo, director of sales and distribution at Prudential Fund Management in Kuala Lumpur.
According to data supplied by Prudential, a total of 49 new equity, balanced and bond offshore funds were launched in 2006 in Malaysia, compared with just 11 the year before. Assets under management (AUM) for offshore funds in the country jumped by 250% from 2005 to 2006. “Even this year, most of the new funds launched have offshore elements,” observed Mr Khoo.
The demand for offshore funds can be attributed to three things: pent-up demand, greater product diversification hence better performance and a more compelling investment proposition, as well as investor maturity.
“For starters, the pent-up demand that has snowballed largely as a result of the exchange controls since the 1997 economic crisis, contributed to the initial demand spike,” said Teng Chee Wai, CEO and executive director at HwangDBS Investment Management.
Bank Negara Malaysia’s recent April ruling, which lifted the ceiling on funds allowed overseas from 30% to 50%, has also helped drive the demand for offshore funds. “We expect this increase to allow the industry to grow by at least another RM6-8 billion over the year,” estimated Mr Teng.
However, the country’s largest pension fund scheme, the Employee Provident Fund (EPF) in June barred its members from using their EPF savings to invest in offshore funds, arguing that offshore funds carried higher risks, including currency and geopolitical risks. “The impact on the market will be that quite a huge amount of potential sales will not materialise,” predicted Ms Noripah.
But beyond the sales, investors using EPF money may no longer be able to reach the ultimate objective of achieving a well-diversified portfolio, pointed out Datin Maznah Mahbob, CEO and executive director of funds management at AmInvestment Management.
Still, the response towards offshore funds continues to be strong. HwangDBS, for example, says that it has had to increase fund sizes of its retail foreign funds at least twice. Its latest global fund, the HwangDBS Global Infrastructure Fund hit a total of RM581 million within 45 days of its launch, well in excess of the approved launch size of RM150 million.
Public Mutual, too, has received robust demand for its regional funds, said deputy CEO Yeoh Kim Hong. The Public Islamic Asia Dividend Fund chalked up more than RM800 million in sales when it was launched in April.
Offshore funds are also getting a boost from the growing investor maturity in Malaysia. As investors demand better returns for their investments, risk management through the diversification that offshore funds can offer will become the name of the game.
“Clearly, it is diversification play. As you put your eggs in many baskets, you are investing in non-correlated markets,” said Ms Noripah. “ It is proven that diversification of investment capital will get you better returns. When one market moves down, another moves up,” she added.
“A lot of people in Malaysia currently don’t have exposure offshore. They have been investing locally. Diversification is crucial,” agreed Mr Khoo. “The beauty of a global portfolio is spreading out the investments. Over a long period of time, some stocks will go up, some down. At the end of the day they balance off.”
“Investors know that investing offshore will provide country risk diversification, product differentiation, new product ideas and variation, new investment opportunities and potential returns enhancement,” explained Ho Seng Yee, CEO of OSK-UOB Unit Trust Management.
Fund managers in Malaysia are beginning to notice that investors are fairly selective when going offshore. “It is no longer sufficient to roll out a standard equity, bond or balanced product,” Mr Teng pointed out.
Most unit trust management companies in Malaysia are, however, not yet at the stage where they have the in-house competencies to invest abroad. “Given the maturity of our unit trust industry, building local competencies will require time and exposure which most are still seeking to develop,” said Mr Teng.
With the liberalisation of exchange controls, local fund houses now have the avenue to delve into alternative asset classes at the regional or global level and to work through tie-ups to offer a whole new range of products in a relatively short time.
HwangDBS, which has about 44.1% of its RM4.56 billion FUM invested overseas, invests offshore mainly through tie-ups with foreign partners like AMP Capital Investors, Aberdeen Asset Management and Macquarie Alternative Investments. It also leverages on its relationship with parent company, Singapore-based DBS Asset Management.
“These partnerships allow, over the short term, faster time to market and provide us with a better ability to meet the go-to-market challenges,” remarked Mr Teng.
AmInvest says that it pulls out all stops in its search for external managers. “We work with the best of the breed. We do a global search for the best in the various categories to complement our in-house capabilities,” Ms Maznah said. “We do the due diligence.”
As Malaysia’s second largest fund management company after Public Mutual, AmInvest has RM16.25 billion of FUM, 2.6% of which goes offshore. It considers its exhaustive manager selection as a value-add and a boost to its future fund of funds ambitions. “We paid for an independent consultant to do a global search and we hunted them down,” added Ms Maznah.
AmInvest currently works with Henderson Fund Management, Oasis Crescent Capital, Schroder Investment Management, Credit Agricole Asset Management and DWS Investment for its nine offshore funds.
In the case of Prudential, being part of a global network means not having to search outside of its affiliated companies. “We don’t outsource because we have the core capabilities in all these areas,” remarked Mr Khoo. Prudential uses M&G Investments, its sister company in the UK, and Prudential Asset Management Hong Kong and Singapore to help it invest what is currently 16% of its RM3.7 billion FUM.
Besides managing some of its overseas investments directly, CIMB works with Templeton Asset Management, UOB Asset Management, Principal Global Investors and Schroders Investment Management to invest 6.19% of its total AUM, or about RM1.011 billion overseas.
With 20% of its RM20.6 billion AUM invested offshore, Public Mutual, on the other hand, prefers to keep the reins in its own hands. It invests directly in regional markets because it wants its investment team to apply existing investment philosophy to regional investments. When it comes to the US and European markets, besides direct investments, the company’s funds also invest in various collective investment schemes managed by global fund managers.
The robust demand for regional and global funds is expected to continue in Malaysia with the industry responding with a wider range of offshore products to cater to the different risk appetites of the investing public, for example, structured principal protected funds for the low-risk investors and at the other extreme end of the risk spectrum, alternative investments or hedge funds for the sophisticated investors..
The potential for offshore funds in Malaysia is a huge one. While there is now a full range of domestic unit trust products available in the country, fund companies are only just starting to introduce offshore funds. “But we have not even covered certain specific regions and there are no country specific or sector specific funds,” pointed out Mr Khoo. “There is an area of growth here.”