Investing in volatile times

Munirah: The government should be credited for its instrumental role in Islamic finance’s rapid expansion.

Volatility is expected to persist through the year, as the main trends driving the turbulence last year, such as global trade tensions, slowing growth, oil prices and mounting debt levels.

But one need not let the uncertainties derail one’s investment plan because when challenges arise, so do compelling investment opportunities.

According to Principal Asset Management Bhd chief executive officer Munirah Khairuddin – thelong-term rule applies – diversification is key.

She says diversification helps investors mitigate volatility and take advantage of opportunities across an evolving set of asset class portfolios. And when markets are down, it is the opportunity to accumulate.

Munirah has been CEO of Principal Asset Management, formerly known as CIMB-Principal Asset Management Bhd, since 2013.

The group was rebranded to its current name in April. This followed US asset manager Principal Financial Group’s raising its stake in the partnership to 60% in 2018 from 40% previously, while CIMB Group reduced its stake to 40% from 60% previously.

The completion of the exercise also resulted in CIMB-Principal Islamic Asset Management Sdn Bhd being renamed Principal Islamic Asset Management Sdn Bhd in April.

Munirah says the rebranding exercise signifies Principal’s deepening commitment to the region, noting the company is aligning its asset management operations more closely with the group’s global mission across more than 80 markets worldwide.

She adds the group is combining its global capabilities with local expertise to deliver investment and savings solutions that will better position the group to tap into the growing middle-class investors in Asean.

In Malaysia alone, Principal served 400,000 investors, with RM55bil in assets under management (AUM) as of April 2019.

Overall, the group’s AUM in the region (including Malaysia, Singapore, Thailand, Indonesia and Principal Islamic) stood at RM83bil as of April 2019.

Speaking to StarBizWeek, Munirah shares Principal’s plan to further grow its business in the region and her thoughts on the prevailing investment landscape. Following is the question and answer session:

What is the group’s targeted growth rate over the medium term?For the group AUM, we have set our target growth rate at 4.36%.

This is on the back of anticipated headwinds from the US-China trade disputes and a moderation in global economic growth. Nonetheless, economic fundamentals in Asean continue to look healthy, signalling its resilience in manoeuvring the current period of uncertainty and volatility.

Thus, we believe there are still plenty of long-term opportunities for growth in the booming asset-management industry of Asean, which remains the fastest growing in the world and projected to reach US$4 trillion (RM16.7 trillion) by 2025.

What is the strategy to achieve that goal?We believe the best strategy is one that is focused on empowering investors with greater choice, considering their varying risk appetites, global investment preferences, and differing levels of investor sophistication. In this regard, Principal’s expertise in fund management, distribution and retirement planning allows us to have a much wider mandate and selection of products and services to draw from in fuelling consistent, longer-term growth.

In the past, we’ve added scale and variety by resorting to a combination of new investment products and finding new alternatives to invest. And now with Principal as the primary shareholder, we’re able to further enhance our local expertise with expanded access to global markets and perspectives. This would also catalyse knowledge and technology transfer towards the development of innovative product and investment solutions powered by the latest digital advancements, some of which we plan to introduce over the coming months.

All in, we see the region’s developmental challenges as exciting ground for new opportunities to emerge, especially in the area of social and environmental investments. On this note, we are working towards streamlining pre-existing funds to be more ESG (environmental, social and governance) compliant, as well as introduce new ESG funds to appeal to the values of a growing class of millennial investors.

How has the landscape of the unit trust fund industry in the country evolved over the years?Over the last two decades, the unit trust fund industry in Malaysia has seen a significant increase, funded by a rise in disposable incomes.

As of March 2019, the total net asset value (NAV) of managed funds capitalised 26% of Bursa Malaysia’s market at RM449.63bil, compared with 14.2% at RM98.5bil in 2005.

The industry’s growth has largely been fuelled by the liberalisation of overseas investment rules by Bank Negara. This has resulted in fund management companies launching numerous offshore funds and realigning the investment strategies of domestic funds to invest offshore and gain a bigger slice of the overseas market.

Moving forward, developments in the country’s asset management space are expected to change the operational landscape, creating increasing competition. This includes the faster adoption of disruptive technology, the growing need to upscale operational infrastructure, creating substantive presence to penetrate domestic growth opportunities, and ambitions to expand regionally and globally. Regulators and investors are also demanding more information, better transparency and faster reporting response times.

What are the prospects of unit trust fund industry?Over the past decade, South- East Asia has become an area of interest for many investment houses. The widening of the middle-income class and the region’s human and natural capital have contributed to this growth.

More recently, the Malaysian capital market has also played a fundamental role by providing access to capital and value creation. That, coupled with its economic success, still makes for a healthy asset management marketplace.

As for specific growth opportunities, Islamic funds have shown exceptionally great promise.

As of March 31, there are a total of 225 Islamic-based funds with 179.95 billion units in circulation, compared with 140 Islamic-based funds with 48.86 billion units in circulation back in 2008.

The government should be credited for its instrumental role in Islamic finance’s rapid expansion, including taking steps to establish forward-looking market infras­tructure, institutions and regulatory frameworks.

Overall, fund management is becoming a fiercely desired space in Malaysia and finding the competitive advantage will be key to success. Developing talent pools and supporting infrastructure to create more value is also necessary to ensure the sector is well-serviced, remains operational and cost-effective.

How to ensure the relevance of unit trust funds to increasingly sophisticated investors, especially the millennials, in Malaysia?The group of millennial investors between the ages 20 and 35 in Malaysia are poised to become the primary income earners and investors in the country over the next three to five years. Their financial preferences are much more subtle and complex than those of previous generations.

Having grown up in the volatile financial climate and information-saturated environment of the last two decades, Malaysian millennials also harbour a deep-rooted scepticism of financial markets and often question the need to pay for financial advice and services.

For this young sophisticated investing community, the relevance of any unit trust products thus relies on meeting three demands in particular: convenience, transparency and affordability.

Firstly, unit trust providers must address the demand for digital accessibility by making their products available on online platforms for greater purchasing convenience. Secondly, unit trust products must be geared towards helping younger investors make their own decisions as opposed to aggressively selling them products, and access to key information is vital in this regard to provide more transparency when choosing between different unit trust solutions. Finally, fees charged on unit trust funds should be made more affordable to coincide with the low-cost investing trend, which is primarily driven today by the millennials.

Can the fees for unit trust funds be lowered?We see technology as the primary catalyst to driving down fees. Technology can serve as an additional investment-planning tool, automate certain mechanical processes, and commoditise parts of what today’s distribution channels can deliver.

Rather than being a threat to the industry, greater adoption of technology could make human advisers become more efficient, allowing them to keep their costs aligned with the value they deliver.

Principal has made a number of key technology acquisitions globally – including RobustWealth, a fintech company that provides a suite of white label solutions for investment advisors including a digital advice platform, goal-based investment tools and efficient client onboarding processes. Similarly for Asean, Principal is considering new ways to integrate digital capabilities with our asset management expertise to help clients in their quest to save more, invest more, and protect more for their financial futures.

How is the response to private retirement scheme (PRS) thus far?PRS continues to attract strong interest among those aged below 30 years.

According to the Private Pension Administrator, the scheme’s NAV rose 20% year-on-year to RM2.66bil in 2018, while the total number of PRS members increased 38% to 416,913 last year from 301,729 in 2017.

The data shows despite a more challenging investment environment, more people saved with PRS last year than in any previous years.

While the pick-up in PRS funds has been encouraging, I believe we could have seen an even higher market cap for PRS if more people were financially literate and aware of the various retirement solutions available to them.

Studies show that many Malaysians lack long-term financial planning, with only a very low proportion of the population considering themselves financially ready for retirement. How can we address the situation?Malaysians are quickly learning that the Employee Provident Fund (EPF) savings alone will not be able to sustain their life post-retirement, hence more and more people are committing themselves to alternatives such as PRS.

It is imperative for all interest groups and stakeholders to come together and have a critical discourse on solving the issue together and possibly present a more unified narrative and strategy on increasing financial literacy.

Current approaches to financial literacy are still ad-hoc, without any strategic leadership or direction.

Both the private and public sectors must work together to develop a national strategy that clearly outlines the steps to take. Many countries worldwide already have some form of national financial education plan; it is about time Malaysia has one as well.

How can PRS complement retirement savings?PRS complements the EPF and provides a platform to achieve a sustainable retirement.

The average Malaysian is expected to live beyond 75 years. The longer you live, the greater the risk of outliving your retirement income.

In addition, over the course of time, the impact of inflation can be significant, and it may reduce your purchasing power. Rising costs of living and healthcare are important factors to consider.

Just start small and put regular savings of RM100 - RM250 every month into your PRS account and in 20 years, depending on the compounded annual returns, you could potentially have up to RM150,000.

Once you have chosen a professional fund manager to manage your retirement fund, all you need to do is monitor your investments once every six months. What’s important is to have a long-term view, so you don’t need to worry too much about markets’ short-term volatility.

Just focus on setting aside those regular monthly savings and invest more, whenever you have extra cash, to build your future nest egg. Over time, through the concept of dollar-cost averaging, that is, getting more units when prices are lower and fewer units when prices are higher, the net price per unit tends to be moderated and the investor will gain from the compounding effect of their funds.

Can you explain the slow growth of exchange-traded funds (ETFs) in Malaysia?This could be due to a lack of investor awareness as well as a lack of financial education.

Though there are many institutional and corporate unit trust agents, there is no active selling or marketing of ETFs to the investing public. There are only 10 ETFs listed on Bursa Malaysia today with a collective fund size of RM1.95bil, mostly supported by institutional investor participation but retail participation continues to lag.

ETFs are a more affordable type of investment and it provides diversification benefits that allow investors to take less risk compared with individual stocks. ETFs also tend to outperform other actively managed funds like unit trust during times of market rally.

Therefore, there is no reason, at least from a structural or fund perspective, that ETFs should be less appealing to investors compared with the other products in the market.

I believe a national financial literacy campaign, targeting all layers of society in Malaysia, is the most effective to increase knowledge about investment types and opportunities. Companies can also do more in terms of marketing their offerings and encourage customers to invest in ETFs.

What is your investment outlook for 2019?Our overall investment outlook for 2019 is as follows:

> We expect moderate economic growth especially in the developed economies. This is just a slowdown and there are no signs of a recession in the next 12 to 18 months.

> Global equity markets may correct in the short-term, but we continue to believe this is an opportunity to add.

> Fund flows to Asia will improve, led by China and Asean.

In 2019, we believe diversification is key. To navigate through the market volatility, our recommendation is for clients to hold a defensive Asia-Pacific portfolio that focuses on yield and dividends.

Our asset allocation strategy is to focus both on equity and fixed income at a 60:40 allocation. This includes global multi-asset portfolios, Asia-Pacific dividend income funds, Asia fixed-income high-yield funds, and balanced income funds in Malaysia.

What’s your comment on Malaysia’s financial market losing its appeal to global investors and facing risks of further outflow of funds?There are several factors contributing to this: external ones include the US-China trade tensions and the volatile oil prices, while internally, Malaysia is seeing a major overhaul in its institutions, as the new government is restructuring the fiscal policies and weeding out the bad apples from its administration.

These factors are temporary in nature. I believe once investors see Malaysia’s resolve in building an administration that practises good governance and transparency and focuses on long-term sustainability, investors’ confidence will be restored.

Given the prevailing economic uncertainties, which sector/asset class will perform well?Malaysian fixed income assets performed well for the first quarter of 2019, with the benchmark government and corporate indexes returning 1.6% and 1.4%, respectively.

We expect the second quarter to have largely similar themes, with market momentum largely driven by dovish global central bank trends.

We expect the US Federal Reserve will keep its funds rate on hold at least through 2019, with Fed chair Jerome Powell and others emphasising patience in normalising policy. This theme will remain the key driver for the global fixed-income market in 2019.

The US-China trade negotiations will likely move towards an agreement or an extension.

Whichever way this plays out, it should have limited impact on local bond yields relative to the equities market.

The majority of Emerging Market economy’s interest rate environment is now expected to remain unchanged, or possibly lower, given the risk of slower global growth and low inflation environment.

Having said that, any worsening of global conditions may possibly warrant export-oriented economies such as Malaysia to ease interest rates and counter these external effects.

This would again be positive for the bond market as a whole.

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