07 April 2017
By Manjit Singh, Asset Management and Insurance Practice Leader, PwC Malaysia and Lum Kar Hoe, Manager, PwC Malaysia
A combination of local and global factors could potentially pose serious challenges to fund managers in Malaysia in 2017. In particular, the industry has seen a shift towards low risk asset classes as well as erosion of net asset value (NAV) especially in wholesale money market funds.
Investors have been shifting their assets towards low risk investments such as fixed income securities and money market instruments in the lead up to the US election. These have not been favourable for fund managers which only earn a meagre 0.1% - 0.8% on money market funds vs 1% to 1.8% of the NAV for managing equity funds.
Furthermore, the possible increase in US interest rates and the expansionary fiscal policies under President Trump is likely to lead to a stronger US Dollar. This inevitably means foreign investors would want to withdraw their funds now to avoid losing out on potential future currency exchange losses.
Fund managers are also faced with a threat of reduction in NAV in the wholesale money market segment due to curtailment of tax planning opportunities. The recent announcement in Budget 2017 as well as the publication of SC Guidelines on Tax Exemption for Wholesale Money Market Funds means corporations could no longer use a wholesale money market fund as a vehicle to avoid paying taxes on interest income.
Consequently, fund managers are seeing redemptions and termination of wholesale funds and face a daunting task to convince wholesale investors to retain their investments. The threat is even more imminent for some of the fund managers which have a significant portion of their revenue earned from managing wholesale money market funds.
The combination of the above factors could help explain the drastic drop in AUM of the wholesale segment, which peaked in October 2016 at RM102 billion before sliding to RM85 billion in February 2017.
Source: Securities Commission, 2017
Given that fund managers require a critical mass of AUM to be sustainable, there is an urgent call for the industry to hunt for new mandates, develop new products and sales of funds to grow the AUM given that some of these institutional investors will eventually withdraw from the market.
There could be a silver lining to convince the institutional investors who no longer have the incentive to invest in wholesale funds on the possibility of relooking at other investments and products that can reaffirm their abilities to earn the alpha i.e. excess return. On the other hand, fund managers can consider remodeling their existing offerings and focus on investment styles and strategies that are gaining in popularity such as smart beta and multifactor investing.
Some fund managers are reportedly harvesting the power of Big Data in identifying investment opportunities enabled by the 4Vs of Big Data (Veracity, Volume, Velocity and Variety). It allows fund managers to design solutions more effectively (e.g. optimisation of portfolio construction) with a view to generating outcomes that are more aligned with investor expectations.
For the institutional investors, there are opportunities to engage fund managers to discuss the possibility of constructing a portfolio of fixed income securities consisting of low risk high quality fixed income securities and money market placements, which can provide stable returns similar to a wholesale money market fund.
Undoubtedly, the industry is facing challenging times ahead. Innovation is crucial as a competitive advantage, but ultimately, success belongs to those who can cater to investors’ needs with speed and agility in view of the sweeping changes taking place in the investment landscape.
 Interest income from wholesale money market funds which were previously exempted from tax payments on interest income
 The Bank of New York Mellon, “Big Data and Investment Management”, 2015