The rising trend of digital investment management in China and Malaysia

THE global capital markets have been experiencing a marked increase in digital adoption across various digital platforms.

One of the prominent digital initiatives which has transformed and disrupted the fund or wealth management industry is digital investment management (DIM), such as robo-advisors.

DIM has garnered interest as an innovative technology-enabled method to facilitate investment decisions and portfolio management.

Digital investment managers assist investors in conducting personalised asset allocation and portfolio rebalancing using sophisticated algorithms by identifying each investor’s unique risk appetite and tracking changing market conditions on a regular basis.

These digital platforms will automatically allocate investors’ funds to a spectrum of financial products, including exchange-traded funds (ETFs), mutual funds, equities, fixed-income securities and commodities.

According to Statista’s report, the total assets under management (AUM) of the DIM market worldwide was US$1.54 trillion in 2022.

The AUM are expected to grow at an annual rate of 10.23%, reaching an estimated value of US$3.34 trillion by 2027.

Although Asia has been considered a late adopter of DIM compared to the US and Europe, the trend is changing.

Digital platforms are now gaining traction in this region, including in China and Asean.

As one of the leaders in global FinTech development, China’s scale of the DIM market was US$96.16bil in 2022.

Meanwhile, the AUM in Asean amounted to US$19.46bil, while Malaysia’s AUM stood at US$1.25bil.

Important drivers of growth

There are several important drivers which have contributed to the recent impressive growth of DIM in Asia, especially China and Malaysia.

One major contributing factor is investors increasingly switching to DIM due to the shortcomings of traditional human advisory services such as limited operating hours, high cost, and relatively high minimum investment amounts.

Comparatively, DIM platforms offer investors more convenience and round-the-clock access to low-cost investment advice.

For example, the annual management fees charged by the DIM platforms in Malaysia typically range between 0.2% and 1% depending on portfolio size and usually, no minimum investment balance is required.

Another attractive feature of DIM is these digital platforms tend to invest in passive investment alternatives such as ETFs and index funds, which results in cost efficiency, reduced behavioural biases and higher net investment performance.

Evidence has shown that the combination of passive investing and cost-efficient strategy pursued by digital investment managers resulted in annual savings of about 4.4% in direct and indirect costs.

As such, it is unsurprising that younger investors, particularly the lower-income and technology-savvy ones, are more inclined to adopt DIM.

For instance, a survey by the Asset Management Association of China showed that in 2018, 36.5% of retail mutual fund investors in China were below 30 years old, of which 71% utilised mobile devices as their primary investment tools.

Meanwhile, another survey by S&P Global Market Intelligence revealed that in 2020, 49% of users of DIM platforms in China were below the age of 39.

Along the same lines, the Securities Commission Malaysia highlighted that the number of new DIM accounts created has increased by 42% from 2021 to 2022, with the majority of accounts held by male investors below 35 years old.

Hence, DIM plays a vital role in the economy by reaching out to the previously underserved market segment, thus promoting financial inclusion.

Besides, the Covid-19 pandemic has accelerated the shift to online financial services, including DIM service.

This accelerated digital disruption stemmed from investors who increasingly relied on the Internet to formulate investment decisions when isolated at home during the pandemic.

KPMG’s 2020 CEO Outlook Survey has reported that 81% of CEOs in the financial services sector believed that the pandemic has accelerated the digitisation of operations and the development of next-generation operating models.

Meanwhile, 76% opined that it has accelerated the creation of new digital business models.

According to S&P Global Market Intelligence, approximately 38% of adult internet users in China adopted DIM services in 2020, while 68% of non-users expressed interest in using these digital platforms.

In Malaysia, there was a significant jump in registering new DIM users from 23,083 in 2019 to 199,224 accounts in 2020.

Overcoming challenges and resistance

Notwithstanding these promising developments, many traditionally-minded investors remain apprehensive and sceptical about DIM.

Firstly, there are inherent technological risks related to data privacy and cybersecurity when using DIM services.

Moreover, investors may perceive these algorithms as less effective than human advisors in formulating subjective judgments.

Another source of distrust stems from the lack of transparency and comprehensibility of the services provided, especially with regard to how these platforms generate their portfolio recommendations.

Thus, it is imperative for DIM platforms to overcome these challenges to ensure their continued growth.

Among the key measures that can be undertaken by major players in the DIM industry in China, Malaysia and other Asean member states are as follows.

First and foremost, regulatory support remains critical to ensure adequate investor protection and compliance with the relevant laws and regulations.

Hence, regulators need to actively monitor and revise legislation in response to any important issues and hazards involving DIM such as transparency, data protection and cybersecurity.

Proper legislation should be in place to ensure that investors are well-informed about the suitability and risks of DIM, appropriate investment recommendations are offered and proper channels to seek redress in the event of dispute or malpractice are established.

Secondly, in response to investor demand for a more personalised and comprehensive user experience, DIM platforms should consider adopting hybrid models blending automation and human expertise.

These hybrid models leverage on the convenience and cost efficiency of digital platforms, while offering human touch by providing some interactions with human advisors. Lastly, DIM platforms should continue improving portfolio personalisation and customisation by developing more robust and complex algorithms to design personalised risk-profiling questionnaires that can effectively offer different investors optimal portfolio recommendations.

This personalisation gives investors better control over their investments and aligns portfolios with their unique investment objectives.

To conclude, the DIM market is expected to continue flourishing at a rapid pace in the coming years.

This is facilitated by the rise of mobile investing, as well as the continued development of artificial intelligence and machine learning algorithms.

The outlook remains promising in China’s case, where this development is supported by its government’s recent digitalisation plan to accelerate new growth engines including supercomputing technologies, Internet of Things applications and 5G mobile networks towards creating a "digital China".

Similarly, Malaysia’s DIM segment will benefit from MyDigital, a national initiative to transform the country into a technology-driven and digitally-enabled high-income nation.

Besides, the numerous collaborative efforts established between Malaysia and China are expected to boost Malaysia’s digital economy further, given the latter’s impressive achievements in the quality, scale and development of the digital economy in recent years.

Dr Chow Yee Peng is an Assistant Professor at Tunku Abdul Rahman University of Management and Technology. The views expressed here are entirely the writer’s own.

The SEARCH Scholar Series is a social responsibility programme jointly organised by the Southeast Asia Research Centre for Humanities (SEARCH) and Tunku Abdul Rahman University of Management and Technology (TAR UMT), in conjunction with the 10-year anniversary of the Belt and Road Initiative.