Published in Asia Asset Management April 2007
Fund managers in Malaysia applaud Bank Negara’s move to further liberalise the country’s foreign exchange administration policies. As of April 1, unit trust and fund management companies will enjoy more leg room to invest overseas.
The country’s central bank has raised the ceiling for funds permitted for offshore investment to up to 50% of net asset value (NAV) attributable to residents for unit trust companies, and up to 50% of funds of resident clients with domestic credit facilities for fund management firms, both up from 30% previously.
“This is very welcome news as the industry now has more flexibility to respond to investor demand,” said Noripah Kamso, CEO of CIMB-Principal Asset Management.
According to Ms Noripah, Bank Negara’s recognition of the pent-up demand for investment products that are partially or completely offshore will provide the local fund management industry with the economies of scale necessary for building their own international investment desks and developing the essential skills to manage global portfolios.
“This is necessary in order to stay competitive and to be able to compete against foreign asset management companies in their own territories,” she explained.
According to the Securities Commission’s 2006 annual report, total NAV of Malaysia’s unit trust industry had risen by 23.6% to RM121.8 billion, while funds under management increased by 29.2% to RM164.4 billion, as at 31 December last year.
SC chairman YBhg Dato’ Zarinah Anwar in her keynote address at the Edge-Lipper Malaysia Fund Awards in February, stated that to date 47 global funds have been launched with a value of RM8.461 billion or 6.95 % of the total NAV for the industry.
Although an increase in offshore fund flows is expected with this new 50% ceiling, it will be more than offset by foreign institutional funds flows that have been coming into Malaysia since the end of last year, said Ms Noripah.
The increase in offshore fund flows will likely come from new investments rather than from investors switching from onshore to offshore products, according to Phua Lee Kerk, CEO of Pheim Unit Trusts.
With the Malaysian market performing quite well, there is an incentive to stay at home. “For those who still have extra money, they may choose to put it offshore as a risk diversification tactic. From a unit trust perspective, the key is risk diversification across different asset classes and different geographical locations,” Mr Phua explained.
With this liberalisation measure, Malaysia can also expect more foreign investors to enter the market. “Foreign investors like to see a freer flow of cash,” said Mr Phua. If investments are limited to the local market and the cash cannot flow outside the country, then the market price tends to get inflated. However, the new ruling should bring the market closer to its real price, he added.
But before everyone hops on the bandwagon headed overseas, some fund managers are calling for vigilance. “Whether the limit is 30% or 50%, the more important thing is asset allocation,” said Wu Yah Ning, head of investment at ING Funds Berhad.
People should not put all their money into foreign funds, she cautioned. Ms Wu said that there should be more training programs for the sales agents, because “whatever they can sell, they will sell.”
“Going overseas is not just buying a fund. There are foreign exchange risks, individual country risks to consider. Sales agents should help their customers access their investment objectives, their risk profiles and advise them properly,” she said.