ASSET AND FUNDS MANAGEMENT
FUND MANAGEMENT INSDUSTRY IN MALAYSIA
About This Topic
This topic provides an overview of the global fund management industry and its counterpart in Malaysia. It also provides an overview of the investment process and how the investor and fund manager can work together to achieve their financial goals.
Finally, there is discussion of the regulatory framework supporting the local fund management industry and the various funds that are available for investment in Malaysia are also listed.

Conventional Fund Management

Malaysia has a well-established fund management industry that caters to institutional investors as well as qualified retail investors. According to the Securities Commission Malaysia (SC), assets under management (AUM) typically originate from unit trust funds, corporate bodies, the Employees Provident Fund (EPF) and wholesale funds.
As at end-December 2022, the domestic fund management industry’s AUM stood at RM906.46 billion – somewhat lower than the RM951.05 billion of a year earlier. The bulk (47.6%) of these funds were invested in equities, followed by fixed-income securities (23.3%). At the same time, the top five fund management companies in Malaysia accounted for 55.4% of the industry’s total AUM (2021: 54.8%)…Read more

Learning objectives:
At the end of this topic, you should be able to:
(a) Obtain a good overview of the global fund management industry
(b) Describe how the investment process functions
(c) Identify the various parts of the investment process
(d) Explain the types of funds available for investment in Malaysia
(e) Describe the roles played by the various components of the local fund management industry.

Contents
Overview of the Global Fund management Industry
Overview of the Investment Process
The Malaysian Fund Management Industry
In Summary
Self-Assessment Questions/Answers

Overview of the Global Fund Management Industry
Fund management is the generic term given to the professional management of securities (e.g. equities and bonds) and assets (e.g. real estate and agricultural land) for the benefit of investors with the aim of meeting specific investment goals. Investor can mean individual investors who most likely invest through a collective investment scheme like a unit trust or exchange-traded fund, or institutional investors (e.g. insurance companies, pension funds, university endowments, sovereign wealth funds) who may appoint an individual fund manager to manage funds exclusively on their behalf.
The range of assets that a fund manager is allowed to include in a portfolio is determined by the investor. These could include:
(a) Equities which are investments in company shares
(b) Fixed Income Instruments – including government, corporate and supra-national bonds.
(c) Real estate Investments – including investments in office buildings and apartment complexes or investments in a real estate investment trust (REIT)
The investment universe is not fixed and is structured to meet the needs of the investor.
In this study guide, “fund manager” will be interchangeably with “asset manager” and “portfolio” as all the terms are associated with the professional management of institutional funds and collective investment schemes. The industry is global and the latest estimate done by the Boston Consulting Group in October 2012 puts the size of the assets managed by the industry at US$58.3 trillion as at end 2011.
The fund management industry has played a vital role in the economy of Malaysia with increasing number of individuals delegating the management of investment portfolios to professional fund managers in recent years. This has created depth in the fund management industry and has in turn led to the development of skilled economies, share analysts, asset allocators as well as new asset management firms that bide well for the Malaysian financial landscape in the coming decades.

1.2 Overview of the Investment Process
For individual managing their own shares portfolio which is confined to a single local market like the Bursa Malaysia and to their favourite shares, the investment process can appear to be intuitive and lack any formal discipline. These individuals will buy the shares when it is perceived to be cheap or when they have surplus cash to invest. It is an uncomplicated exercise.
For the professional fund manager, this intuitive approach is not sufficient. The investment process is essential to any fund manager because:
(a). It provides an outline to the crucial steps necessary to create a portfolio starting from obtaining the investment mandate to asset allocation and individual security selection.
(b). It identifies the various areas where the fund manager can add value to the client through research and security selection
(c). Outstanding long-term performance of the portfolio depends on having the correct building blocks to understand the interaction of the markets and their individual components.

A detailed discussion of the investment process is in Topic 4 of this study guide. As an overview, the investment process is thus based on the following basic steps:
(a) Understanding the investor and his investment goals
(b) Conducting research into current and future economic conditions.
(c) Portfolio construction
(d) Monitoring the performance and reporting to the investor
(e) Periodic review of investments goals and the investment portfolio
The Fund Management Industry In Malaysia is vibrant and growing rapidly as the investing public realises the benefits of professionally managed funds. As of 31 December 2013, there are 78 fund management companies (FMC) in Malaysia and altogether RM588.41 billion of funds under management.
As for unit trust funds in particular, as on December 2013, there are altogether 595 approved funds, of which 417 are conventional funds and 178 Islamic funds. The total NAV of the unit trust industry, as of 31 December 2013, amounts to RM<335.51 billion.
In an effort to encourage the public to save more for their retirement, the Private Retirement Scheme (PRS) was introduced in 2012. Individuals can claim a tax relief of up to RM3,000 per annum to invest in PRS funds and this incentive will be available for up to 10 years from 2012.

1.3.1 Regulatory framework and applicable rules and regulations.
FMCs in Malaysia would be required to hold the Capital Markets Services License (CMSL) for the business of fund management. Their representative (i.e. fund managers) would be required to hold the Capital Markets Services Representative Licence (CMRSL) for the business of fund management. This is to ensure that the FMCs are adequately regulated by the authorities and that the participants are sufficiently qualified in their work task of fund management.
Apart from the requisite CMSL and CMRSL, the FMCs are subjected to be the Companies Act for the incorporation of Asset management Companies and Exchange Control Regulations for foreign currency investments.
These fund management companies (FMCs would also need to adhere to the guidelines put forth by the Security Commission (SC) to assist the fund management companies in adhering to the law. These guidelines include the following:

Guidelines:
Guidelines on Compliance Function for FMC
Guidelines on Trust Funds
Guidelines for Public Offerings of Securities of Closed-end Funds
Guidelines on Prevention of Money Laundering and Terrorism Financing for Reporting Institutions in the Capital Market
Guidelines on Private Retirement Scheme
Guidelines on Exchange-Traded Funds
Guidelines on Islamic Fund Management

In addition to these guidelines, it is important to note that the fund management companies conduct their transaction in numerous bourses and marketplaces that will have their own individual rules and regulations. For example, fund management companies that transact shares on the Bursa Malaysia would be subjected to the Rules of the Bursa Malaysia Securities Berhad and its related entities. Thus, the fund management companies must be cognisant of the rules and regulations that apply to them in their course of doing the business of fund management.

1.3.2 Industry Participants.
A. Regulator
The Securities Commission (SC)

B. Market Intermediaries
(a) Bursa Malaysia
(b) Commercial banks
(c) Investment banks
(d) Stockbroking Companies and Stockbrokers
(e) Unit Trust Management Companies
(f) Private Investment Scheme (PRS) Providers
(g) Insurance companies
(h) Asset Management Companies

C. Supporting entities
(a) Federation of Investment Managers Malaysia (FIMM)
(b) Custodians
(c) Consultants

Regulator
The Securities Commission (SC) functions as the regulator of the fund management companies and the securities industry in general. The SC is empowered to make regulations to ensure the smooth running of the industry and to encourage and promote a strong and healthy securities market in which the fund management companies play an integral role. At the same time the SC has a dual role to maintain the confidence of investors by ensuring adequate protection for them.

Market Intermediaries
Market intermediaries – Bursa Malaysia
Bursa Malaysia is an approved exchange holding company under the Capital Markets and Services Act (CMSA 2007) and it operates a fully-integrated exchanged which offers equities, derivatives, offshore listings, bonds, as well as Islamic products. Its subsidiary, Bursa Malaysia Securities, regulates and operates the securities trading activities in Malaysia. The stock market has about 1,000 listed companies. Another subsidiary, Bursa Malaysia Derivatives Berhad (BMD) operates and maintains a futures and options exchange. It offers a variety of derivatives products including the crude oil futures (FCPO) contract and the FBMKLCI futures contract.

Bursa Malaysia plays an important role in the fund management landscape of Malaysia as the majority of fund managers execute securities transaction on their electronic platform.

Market Intermediaries – Commercial banks
Commercial banks’ – function is typically uncomplicated. They accept deposit money into their bank and then lend that money out to consumers and companies in need of capital. They charge interest fees for this service.
As for their role in the fund management industry, banks will assist fund managers in the money and foreign exchange markets. Banks will hold excess cash of fund management companies and pay the fund manager an interest. Banks will also be able to accept term deposits and assist the fund manager in acquiring cash management instruments like commercial paper, treasury bills and treasury bonds through their Treasury department. This department also helps the fund manager in converting foreign currency back to Ringgit Malaysia (RM) upon any sale of foreign assets or vice versa, the purchase of foreign currency to pay for these foreign securities and assets. If the fund manager wants to buy a derivative  to hedge any portion of their portfolio, banks can also help in structuring options for the fund manager.
Banks can also function as custodians of the portfolio of the assets of the fund manager (Physical share certificate, debentures, precious metals, etc.).

Market Intermediaries – Investment banks
Investment banks, totalling 15 in Malaysia, currently have two primary functions raising and investing capital and advisory services. It is through the capital markets serve as an intermediary for fund managers interested in subscribing to new issues of equity and debt raised by the investment bank. They are also involved in the secondary trading of these issues.
All investment banks in Malaysia offer stockbroking services. Through this service, the investment bank helps fund managers execute their securities trades. Furthermore, the investment banks take part directly in fund management as they are allowed by law to undertake fund management and unit trust businesses.

Market Intermediaries – Stockbroking company
Stockbroking company means a holder of a CMSL for the regulated activity of dealing in securities that is registered as a participating organisation under the rules of the stock exchange. The terms “stockbroker” or “broker” shall be construed accordingly.
They perform the traditional execution service as well as other services for the fund manager. The range of services offered by a stockbroker depends on whether it is a Universal Broker, 1+1 Broker, standalone or special scheme broker. A Universal Broker can do stockbroking, equity underwriting and submission as well as debt underwriting. 1 + 1 Brokers can do stockbroking and equity submissions and standalone stockbrokers can only perform the execution function. Special Scheme brokers tend to be foreign-owned stockbrokers granted special licences to operate in Malaysia.
Altogether there are 36 stockbroking companies in Malaysia and 14 of them are categorised as Investment Banks. These investment banks are able to offer a full range of integrated capital markets and financial services. These would include corporate financé , debt securities trading and securities dealing.
Apart from providing the basic execution services to the fund manager, stockbrokers can often add value to their clients with market advisory services and discretionary execution of the fund manager’s trades. The brokerage houses are closer to the fund managers. This research could encompass economic research, credit analysis of debt instruments, company research and political analysis. This can be extremely useful to the fund managers as it offers an alternate view for the managers to consider in managing the portfolios.

Market Intermediaries – Unit Trust Management Companies (UTMC)
Unit Trust Management Companies (UTMC) are companies that are authorised to issue or offer for purchase of unit Trust scheme as defined in sub-section 2(1) of the CMSA 2007. There are currently 38 such companies in Malaysia and they manage a total NAV of RM335.51 billion as of 31 December 2013. These companies form the integral part of the industry by marketing and distributing unit trusts. With the advent of the Private Retirement Scheme, the UTMC also serves as a conduit for the marketing and distribution of PRS funds.

Market Intermediaries – Private Retirement Scheme (PRS) providers
Private Retirement Scheme (PRS) providersare as prescribed under subsection 139P(1) of the CMSA 2007, approved by the SC under subsection 139Q(3) of the CMSA 2007 to establish, offer or provide a private retirement scheme or hold himself out as establishing, offering or providing a private retirement scheme. There are 8 PRS providers as at 31 December 2013.

Market Intermediaries – Insurance companies

Insurance companies – sell life and other insurance policies to holders and thus have long-term liabilities that must be accounted for. These insurers will invest the collected premiums to generate a return to meet those long-term liabilities. These assets can be managed either in-house through an internal fund management team or externally through an external fund manager. As these insurance assets grow, these insurers become an ever-important player in the asset management scene and compete with the other fund management companies for assets.

Market Intermediaries – Asset Management Companies
Asset Management Companies – function like regular fund managers and are required to hold the CMSL. There are more than 80 Asset Management Companies (AMC) in Malaysia. Their representatives would need to hold the CMSRL for the business of fund management. These Asset management Companies are prohibited from offering unit trust product to the public but can only offer wholesale funds to sophisticated (qualified) investors. The assets under management are similar to the UTMC and companies equities, treasury bills and bonds, commodities and real assets.

So, these companies also market to participants like the UTMCs and would be actively dealing with investment banks and stockbrokers.

Some AMC are boutique fund managers which are defined as investment firms established by an individual or group of individuals. They are typically established by experienced managers who focus on a particular investment strategy or niche and typically charge performance fees. Foreign fund managers are 100% owned by foreigners who may also be  boutique fund managers or asset management companies. Like the asset management companies, they can only offer funds to sophisticated investors and not to the general public.

Supporting Entities – Federation of Investment Managers Malaysia (FIMM)
Federation of Investment Managers Malaysia (FIMM) – is a self regulatory Organisation (SRC) which is tasked to regulate the unit trust industry and its members for the benefit of the industry and the investing public at large.
Among the objectives of FIMM are:
(a) To improve the regulatory, fiscal and legal environment for unit trusts
(b) To formulate sound and ethical business practices to promote the interest of the unit trust industry and provide investor protection.
(c) To provide information, assistance and other services to its members
(d) To promote public awareness of the benefits and risks of investing in unit trusts.

Supporting Entities – Custodians
Custodians – are  financial institutions and trust companies who are responsible for the safeguarding of assets of fund managers and insurance companies. Custodians can be, cash and cash equivalents. These include both domestic and foreign assets.
Custodians can also arrange for the settlement of any purchase and sale of securities and take the delivery of such securities directly rather than through the fund manager. They help fund managers to administer corporate actions on securities held such as the receipt of dividends, stock splits, rights issues, tender offers and calls on callable securities among others. Some custodians also help in performing fund accounting for the fund manager. Custodians are remunerated through a custody fee which is normally a percentage of the asset value that they are custodians of.
Supporting Entities – Consultants
Consultants – roles are important as they are the first contact with the investing public. These consultants are registered with Federation of Investment Managers Malaysia (FIMM) to ensure that they have obtained the minimum qualification and product knowledge and can deliver competent advice. Unit Trust Consultants (UTCs) advise potential investors on suitable unit trust products that meet their needs. Private retirement scheme consultants (PRS Consultants) are individuals who market and distribute the PRS. Other fund consultants advise qualified investors on the intricacies of more complex fund products such as structured funds or capital enhanced products which may involve derivatives. These play a similar role to the UTCs as they identify the risks of the products and ensure that the investor is invested in the right fund given their needs. Consultants in  Malaysia do not operate as principals but as representatives of either the Unit Trust Management Companies (UTMC) or Corporate Unit trust Advisors (CUTA). Financial planners, on the other hand, can operate as principles subject to these planners meeting the licensing requirements of the Securities Commission.

Supporting entities – Credit/Rating Agencies
Credit Rating/ Rating Agencies comprises of the two agencies in Malaysia, Rating Agency Malaysia Berhad (RAM) and Malaysian rating Corporation Berhad (MARC), and other global rating agencies like Standard & Poor and Moody’s help fund managers in so far as they provide them with an independent third party opinion of the creditworthiness of the securities that the fund manager wishes to add to their portfolio. In some instance, the fund manager is prohibited from buying securities below a certain rating, e.g.  below investment grade. Without an external third party like the rating agencies, there is no objective determination of the rating of the securities.
The rating agencies have the necessary expertise and the economies of scale to perform the task of rating an issue. The credit angle is often one of many aspects that the fund manager considers when trying to decide whether to buy or sell a security. It is far more efficient for the fund manager to rely on the rating agency  for a credit assessment than to conduct primary credit research himself.

Actuaries
Actuaries are professionals who deal with the financial impact of risk and uncertainty. Actuaries provide expert assessments of financial systems and its possible impact on the portfolio values of the fund manager. Actuaries are often used by insurance companies to help with the qualification of mortality rates and the pricing of such risks. For fund management, actuaries help in formulating market risk and stress testing to ascertain the impact of undesirable outcomes such as hyperinflation, recessions, war and drastic increases in commodity prices. Actuaries help the fund management industry price risk and to manage them appropriately.
Equity Funds
Invest mainly in listed company shares on the Bursa Malaysia and other overseas exchanges. Within the equity funds, there are aggressive growth funds which invest in growth companies but these funds carry the highest risks. There are also blue chip equity fund is the income fund which invests mainly in high-dividend shares with the primary aim of providing the investors with a high current income and some scope for capital appreciation. Other types of available equity funds are country funds  (which focus on sectors like Asian Financial Institutions, Asian REITs and Technology) and index funds (which attempt to mirror the returns of an index  like the FBMKLCI).

Bond Funds
Invest in corporate bonds, Malaysian government securities, Cagamas bonds and other liquid fixed income instruments. These funds aim to provide regular income with less emphasis on capital appreciation of the portfolio. These funds are moderate to low in the risk spectrum.

Balanced Funds
Invest in both equities and fixed income instruments. The balance fund is geared towards investors looking for a combination of safety, income and moderate capital appreciation. These diversified holdings ensure that the portfolio will not suffer drastically in equity market downturns but will also not aggressively participate in any equity market upswing, The balanced fund has a moderate risk profile.

Money Market Funds
Invest in money market instruments. This cash or near-cash equivalents are short-term in maturity (less than 1 year) and carry very little risk. These funds are very conservative and aim to provide the investor with a return slightly higher than short-term bank deposits.
Islamic Funds
Invest in Shariah-compliant investments including shares and bonds. The main objective is to provide investors with returns consistent with the principles of Islam. The risks of the funds are determined by the ratio of shares to bonds within the funds. The higher the ratio of shares to bonds then the higher the risk of the fund.

Real Estate Funds
Invest in real estate shares and REITs (Real estate investment trusts). These funds aim to provide the investor an exposure into the real estate sector. The funds mainly provide current income with a small scope for capital appreciation. The risks of the funds are moderate to high depending on the mix of the investments.

Wholesale Funds
Are funds that are offered to qualified investors who are deemed to be sophisticated investors. Who are deemed to be sophisticated investors. Sophisticated investors are either high net worth individuals with more than RM3 million in net worth or professional investors who are deemed to have the requisite investment knowledge. These wholesale funds can range from the usual equity and bond funds to the more complex structured funds so suit the needs of these investors.

In Summary
The Fund management industry is global and thriving. In Malaysia, growth in the industry comes with the realisation on the part of retail investors of the many benefits of professionally managed funds. There are a variety of products such as unit trusts and the private retirement scheme offering equity, fixed income, balanced and real estate funds to cater to the needs of these investors.  
In Malaysia, the fund managers, banks, investment banks, custodians, stockbrokers rating agencies, actuaries and consultants all play an integral role in the industry. Together with the regulator, the SC, these components of the industry gel together to create a safe and vibrant environment for investors to confidently invest their savings to attain their financial goals.

References:
1. Capturing Growth in Adverse Times: Global Asset Management 2012 published by Boston Consulting Group in October 2012.
2. Global Asset Management 2013: Capitalizing on the Recovery
3. Global Asset Management 2023

Questions
1. What is the investment process?
(a) Understand the investor’s goal
(b) Conduct research
(c) Portfolio Construction
(d) Portfolio Monitoring
(e) Portfolio Review
All above must be conducted on continuous basis.

2. Wholesale funds can be offered to retail investors – FALSE Statement
3. Which of these help the fund manager in their assessment of risk for
their portfolios?
A. Actuaries
B. Stockbrokers
C. Investment Banks
D. Security Commission Malaysia