EVEN though 2003 will be a challenging year for the unit trust industry in view of the global economic slowdown and depressed investment environment, many unit trust management companies are still optimistic that the industry will continue to grow this year.
Outlook for 2003
TA Unit Trust Management Bhd chief executive officer Richard Chua said although 2003 would be a challenging year for the industry with the imminent threats of the Iraq war and terrorism, as well as the world economic slowdown, the company was still upbeat that the industry would continue to grow exponentially for many years, albeit not smoothly all the way.
“It will be a difficult year at least for the first half of 2003 due to the above factors. Going forward, we think the valuation of KLSE is compelling enough to induce interests. The key ingredient here is that our economy is expected to grow more than 5% in 2003 on the back of strengthening domestic demand and less dependence on exports growth, which I think differentiate us from other markets.
“We anticipate the unit trust industry to grow by at least 15% this year (2002), but are cautiously optimistic that it will be a better year this year bearing in mind that 2002 was a very 'eventful' year,” he said during an interview.
CMS Trust Management Bhd CEO S. Kumaravelloo Pillai said most people were bullish of the stock market’s performance this year. He added that unit trusts sales would also pick up as the company did not foresee any upward movement in savings interest rates.
Pacific Mutual Fund Bhd CEO Michael Auyeung said the outlook for this year would depend on the investment environment.
Should the current uncertain stock market conditions prevail, then the environment next year for the industry could be difficult to navigate, he explained.
Coupled with the existing very low bond yields that even bond funds may prove less enticing a refuge than they had been this past year, Auyeung noted.
On the other hand, he said the sales momentum established by the bank’s distribution channels (for unit trusts) should sustain the industry’s growth next year.
The net asset value (NAV) of the unit trusts industry, according to Chua stood at RM47.4bil as at end-2001 which accounted for just 10.2% of the total KLSE market capitalisation.
For the industry to capture 40% of the KLSE market cap (which is the benchmark in developed countries), the industry would need to grow consistently at an annual compounded growth rate of 15.3% for the next 18 years which is quite possible to achieve.
Similar views were echoed by Prudential Unit Trusts Bhd CEO Mark Toh and Kumaravelloo.
According to Toh, there was still so much potential in the unit trust industry and opportunities were abundant judging from the fact that the industry only makes up 10% of the KLSE market cap.
The gradual implementation and realisation of the Capital Market Master Plan would also provide new opportunities for market players to capitalise on, which could bring to the discovery of investor’s needs, and ultimately, new innovative products.
Competition among players is expected to continue to dominate next year. According to Auyeung, the industry had become more competitive leading to squeezing of margins.
According to Kumaravelloo, the company felt that third party agents or institutional unit trust agents (IUTAs) will face some difficulties even if the market is bullish and their sales at the same time will decline compared with 2002.
“IUTAs have been very active and they have exhausted their base in the last two years. The majority of their sales this year came from the early first half when the KLSE was performing well. That was the period when the Composite Index closed at a high of 808 points before dipping down to 616 points recently, a drop of about 24%.
“Therefore, most of the IUTA’s clients (investors) have experienced a one fourth decline in the value of their investments,” he stressed.
As the general level of investor sophistication increases, Kumara-velloo added that there is now a shift towards consistency of funds performance over the longer term.
According to him, the focus now is on which fund has been most consistent over the last 3-5 years rather than which is the number one fund (by viewing the Lipper ranking of funds).
While agreeing with Kumaravelloo, Chua said in a difficult environment, fund performance would also be compared with other investment alternatives.
The need to educate investors, according to Toh, is a continuous challenge for the industry. Malaysians today, put most of their monies into bank deposits - approximately between 65% and 70% of household assets are kept in banks.
The challenge for the industry, he said, was to migrate these cash pools into unit trusts and at the same time, offer the same safety as a bank but better returns and liquidity.
As investors become most savvy and their needs become more complex, one of the challenges facing the industry would be to come out with more innovative products that cater to their needs.
According to Kumaravelloo, the relevant authorities should also consider revising upward the proportion of funds that can be invested overseas.
At the moment, he added that all unit trusts funds were allowed to mainly invest in the local capital market and this limits their ability to diversify.
Another challenge, Auyeung said facing the industry was the emergence of investment-linked products. These hybrid insurance instruments, according to him were edging ever closer to becoming unit trusts and with the less stringent guidelines overseeing their development had given them a leg up compared with unit trusts.
These investment-linked products do not require rigorous approval and disclosure process compared with unit trusts and hence allowing them to be launched at a much greater pace and diversity unlike unit trusts.
With more than 178 funds available in the market and nearly all of them homogenous, Toh said it made business sense to consolidate those funds that are too small to achieve economies of scale.
Through consolidation, smaller funds would feed into larger ones and by achieving economies of scale, the fund manager can lower the funds management expense ratio, Toh noted.
This will also result in fewer funds of the same sort for investors to filter through when selecting a fund that matches his investment objectives.
As previously mentioned, Auyeung said in due course, competitive pressure would prompt the need to consider consolidation. Should there be more mergers, that may act as a catalyst for the industry to consolidate due to the multiple bank-backed unit trust companies.
On the other hand, Chua does not think there was a necessity in the first place for consolidation compared with the ongoing merger in the banking fraternity.
Commenting on this aspect, he said: “The unit trust industry is slightly different. The industry itself does not take any sort of risk unlike the banks or stock broking companies.
“The investors’ funds are always safe with the trustees. If the unit trust company is too small or not competitive or not viable, the investors’ funds are still safe. The trustee can appoint a new management company if need be.
“It’s best to leave the industry to settle the issue.”
According to Kumaravelloo, although the size and the backing of a large financial institution does matter when coming to survival, nevertheless it is secondary when coming to good fund performance.
For instance, he said of all the companies that manage to get Standard & Poor’s Micropal 5-star ranking, only two companies are amongst the top 10 largest companies in the country in terms of fund size.
Suggestions to enhance industry
Toh said the authorities had done much through the gradual implementation of the capital Market Masterplan throughout last year. It’s a comprehensive and complex plan that would take time to boost the industry.
Agreeing with Toh, Kumaravelloo said the Securities Commission was seriously looking into implementing certain recommendations put forth in the Masterplan, especially this year.
He also added that at the same time, keeping the local stock exchange as competitive as possible was important.
In this respect, Kumaravelloo said the planned de-mutualisation of the KLSE was a step in the right direction to generate more regional interest, and to foster a stronger stock exchange.
Auyeung said with regard to investment-linked products, there was a need to even the playing field between these type of products and unit trust products with regards to guidelines, approval and disclosure processes.
Chua said the proposed introduction by the Securities Commission of more investment tools in the market such as the single stock futures and options, hopefully by the end of this first quarter, would not only add more breadth but also create more opportunities for the unit trust industry to grow in tandem by the broadening of the investment scope.
Chua of TA Unit Trust said based on fundamentals, the market was expected to perform better this year. Malaysia’s GDP growth was expected to exceed 5% this year and this augurs well for the market.
Furthermore, IMF in its report, according to Chua, had predicted that the world economies were expected to grow by 2% - 3% and if all goes well, next year would be a better year for the market.
Kumaravelloo said: “Locally, there is still a lack of follow-through as fund managers are still cautious about corporate earnings.
“On valuation, our market has a forecast of 11x price earnings ratio for next year. This is not expensive from the historical perspective. For next year, we expect the equity market to perform much better than in 2002.”