This article first appeared in Personal Wealth, The Edge Malaysia Weekly on January 28, 2019 - February 3, 2019

Retail investors have not been investing directly in bonds on the local market due to the lack of information and high cost of entry. However, these fixed-income products may become more affordable and accessible soon as industry players introduce solutions that address long-standing concerns.

iFAST Capital Sdn Bhd, which runs online investment platform Fundsupermart.com (FSM), is one of the parties working with regulators to achieve that goal. The company plans to attract retail investors by allowing them to buy corporate bonds in smaller denominations, from as low as RM10,000. It already has a platform — Bond Express — that enables such transactions (since April 2017), but it is only open to high-net-worth investors in Malaysia. It is the only platform in the country to offer lots at this amount.

“The key feature of Bond Express [right now] is that we are able to cut down the size of the bonds to RM10,000 per odd lot. If you go to a bank, even RM250,000 per odd lot is very limited because in the standard lot locally, they trade corporate bonds at RM5 million and government bonds at RM10 million,” says Wong Weiyi, general manager of FSM Malaysia.

Malaysian Government Securities (MGS), which are already accessible to retail investors, are also available on the platform from as low as RM10,000.

“MGS are supposed to be a retail product, but banks have to call each other and make deals [to buy and sell the products]. For all that effort, many do not want to do RM10,000 per odd lot as they can secure a larger trade with the same call,” he says.

Wong expects corporate bonds to be made available to retail investors by the second quarter of this year. “We are keen to do this. There are some factors that are preventing us from cutting the retail bond size to RM1,000 per odd lot because we need to enhance the custodian arrangement for the bonds. Currently, for every transaction between us and clients, we incur quite heavy costs. So, it will not work if the size is too small and whatever we charge the clients cannot cover the cost,” he says.

There are advantages to buying bonds, according to market observers. Unless they default, individual bonds will not lose their value. By comparison, bond funds can lose their value as the fund managers often trade multiple bonds in their portfolios depending on economic conditions and market movements.

The regulators have been working to liberalise the bond market to increase its breadth and depth. Last September, the Securities Commission Malaysia (SC) introduced a new framework that would allow retail investors to access corporate bonds and sukuk traded in the over-the-counter (OTC) market. Under the framework, only bonds that have been in the market for at least 12 months and have a minimum credit rating of A, among other criteria, can be traded.

Other liberalisation measures include requiring issuers of corporate bonds and sukuk to only come out with a product highlight sheet, doing away with the need for disclosures through a prospectus. The range of corporate bonds and sukuk that can be offered to retail investors have also been expanded to include more than just plain-vanilla products.

Prior to this, only sophisticated investors — those with at least RM3 million in assets or an annual income of more than RM300,000 — could invest in corporate bonds. “If you restrict this just to rich people, it is unfair because the product is not that hard to understand, especially bonds with better grades,” says Wong.

Even for some sophisticated investors, spending RM250,000 on a normal lot may affect their ability to diversify their portfolios, he points out. “I think Bond Express is more suitable for retail and high-net-worth investors. We have a wide range of clients, some of whom are very rich while others barely qualify as high-net-worth investors.

“The ultra-rich will not use this, but we have a lot of clients at the entry level who see this as an alternative to fixed deposits and want to try it out. It is more appealing to those at the lower end of the spectrum [of what defines a high-net-worth individual].”

Are retail investors ready?

The path to liberalisation of the bond market began a few years ago. In 2013, Bursa Malaysia tried to spur the retail bond market by introducing Exchange Traded Bonds and Sukuk (ETBS), which allows retail investors to participate for as low as RM1,000. However, only three retail sukuk (all issued by DanaInfra Nasional Bhd) have been listed on the platform and their trading performances have been weak, according to reports.

Yeap Kar Chun, assistant manager of the fixed income division at FSM, says this is not due to a lack of interest among retail investors, but rather a gap in the bid and ask prices. “There were only three bonds from the same issuer, with low yields. If you log into your brokerage account, you can see that the bid-ask price is so wide — it is close to 1%,” he points out.

“On top of that, you have to cover the brokerage fee, just as you do for stocks. You have a low-yield bond with a lot of costs to transact. So, it makes little sense for investors.”

As the ETBS is traded on Bursa, it may be attracting the wrong kind of investors, Wong suggests. Traders tend to look for investments with high returns and capital appreciation on exchanges.

“Bonds are not the right product for stock exchanges because the price does not move that much and your returns are fixed. You will not get capital gains for normal rated bonds. You may only get that if you buy distressed bonds and someone comes along to save the company. But even that is very uncommon,” says Wong.

He adds that investors on FSM’s platform, which offers unit trusts and bonds, could be a better avenue. “We have a lot of clients who are not stock traders. They do not expect returns of 5% or 10% every month. They are looking for stable returns and [may be inclined to] buy bond funds.”

Following the launch of the ETBS, some industry observers opined that Malaysian investors were not well informed enough about bonds to consider it an investment. Yeap and Wong agree that more education is needed, especially since the lack of information and transparency in the bond market is stacked against retail investors.

“From our perspective, the awareness is low among retail investors. If you ask anyone on the street about bonds, they may not know what you are talking about, unlike stocks. I think there is a knowledge gap to be filled before pushing the product into the retail space,” says Yeap.

It can be difficult to find research on individual bonds and prices can only be obtained by calling banks. According to Wong, that is the biggest gap he has observed in the local bond market.

“We have a lot of reports on stocks released by brokerage firms, but research on bonds are usually only available at the institutional level. Reports on bonds are also a little different,” he says.

“When we talk about stock research, the analyst always gives you a target price, what kind of growth rate to expect and what kind of business the company is doing. For bond research, we focus on how solid the balance sheet is and how much debt the company has. If the company went bust today, could it pay off the bond?”

FSM offers research reports on specific bonds on its website. Apart from them, the SC’s Bond + Sukuk Information Exchange also carries third-party reports on individual bonds in the primary and secondary market.

The lack of transparency and access to bonds is a problem in many countries. That has created a demand for FSM’s online bond platform, which allows investors to purchase bonds online according to a listed indicative price. That is why when FSM launched the product in Hong Kong and Singapore, there was positive response from investors, according to Wong.

How does Bond Express work?

On the Bond Express platform, FSM purchases selected bonds and break them down into smaller lots, most of which are priced at RM10,000. Investors then buy the lots from FSM. When bondholders want to sell their bonds, FSM will buy them based on the real-time price displayed on its website. FSM acts as an intermediary in the corporate bond and MGS markets.

As at December, there were 25 bonds in three different currencies listed on the platform. Available bonds included those from AEON Credit Service (M) Bhd, ARA Asset Management Ltd (SGD), CIMB Group Holdings Bhd and Mah Sing Group Bhd. As FSM has to take the risk of market making, it has to filter its selection carefully.

“There is a risk involved. That is why we are extra careful in terms of bond selection. We look at the creditworthiness of the company — whether we think the bond is offering good returns relative to the risk — and we go through in-depth research of the company to make sure it is not in trouble,” says Yeap.

The products on the platform vary in terms of currency, quality and issuers. Some are ringgit-denominated corporate bonds issued by well-known companies. However, risker and high-yield foreign bonds are also available on FSM’s online bond platform, where sophisticated investors can put in orders for bonds for as low as RM10,000.

But what if a bond issuer defaults or needs to restructure its debts? Such corporate actions will require bondholders to vote on the outcome. Depending on the custodian bank holding the bond investors’ assets, in some cases, FSM may have to vote on behalf of the Bond Express investors.

“The first thing [they would do] is go through a negotiation, which can include a request to extend the bond’s due date or to revise the interest rate. The worst case is that they will liquidate the company and see how much you can get back. While this amount varies, it can go up to 40% typically in developed countries. It is lower in developing countries like Malaysia. You could lose a huge chunk of money, although they will usually restructure before that. When we are informed of the proposed restructuring, we have to decide whether we want to accept it or not,” says Wong.

“Sometimes custodians tell us that we can send two orders to them, with RM50,000 worth of investors who agree and RM200,000 who disagree, for example. But there are times when the custodian says no and that FSM has to make a decision for the whole amount. Before clients buy on the platform, there is already a declaration that there will be situations when we have to vote for you. So, we will try and choose what is best for everyone.”

A similar situation occurred to FSM Singapore in the past, when oil and gas firm KrisEnergy had to restructure its bond. FSM Singapore found the restructuring deal unfair to bondholders and wrote two open letters to its clients who held the bonds, encouraging them to vote against the deal. Subsequently, the custodian bank and the company had to meet with the FSM Singapore fixed-income team and CEO to discuss the issue.

“You can see that things are different in the bond market. Some want to just settle the problem in ways that may not be in the best interests of minority shareholders. In the end, FSM Singapore did not succeed. But the papers started to cover the fact that there was a minority voice that acted differently and demanded that the company do more,” says Wong.

Despite that activist effort, he cautions that retail investors still have to be cognisant of the fact that their holdings through Bonds Express is usually in the minority, compared with the holdings of institutional investors and high-net-worth individuals.

“If you agree to the deal offered, you may get a little more out of it because typically, for those who agree, they will get an incentive of 0.1% or 0.3% while dissenters may not get one. So, you have to think about it from that perspective. The bond market is a little more complicated,” says Wong.

FSM’s bonds platform also offers primary issuances. For instance, it offered bonds issued by Kenanga Bank Bhd, Ecoworld International Bhd and AEON Credit last year.

FSM’s online bonds platform and Bond Express have seen more than 400 transactions by around 200 investors since they were launched in April 2017, according to Wong. Most of the transactions are in ringgit.

“Most of the clients have private bank accounts and were not existing Fundsupermart.com clients. We also have clients who are ex-traders and are very wealthy. They have invested a few million ringgit [on Bond Express],” says Wong.

Sometimes, these clients come on board because FSM has a wider variety of bonds available or because it charges a lower transaction fee of 0.5% for corporate bonds and 0.1% for government bonds. “They are very sophisticated. Some of the banks’ mandates do not allow them to dabble in riskier bonds. But the clients have an appetite for higher risk,” says Wong.

Low-fee model appeals to investors

iFAST Capital Sdn Bhd, which operates Fundsupermart.com (FSM) in Malaysia, arrived on the local scene in 2008. For the past 10 years, it has disrupted the market by selling unit trusts, bonds, insurance and managed portfolios online at low fees, allowing investors to bypass traditional distribution channels and purchase funds online entirely on their own.

The company is wholly-owned by Singapore-based iFast Corp Ltd, whose group of companies are also present in Hong Kong and China. The company also has a business-to-business arm that provides investment solutions for financial advisers and institutions, among others, in Malaysia.

According to Wong Weiyi, general manager of FSM Malaysia, the platform has more than 25,000 account holders and iFAST as a whole has about RM1.8 billion in assets under administration in Malaysia as at September last year. FSM Malaysia has more than 400 retail, wholesale and Private Retirement Scheme (PRS) funds on its platform. Its maximum charge for most funds are 1.75%. The PRS and bond funds have no upfront charges, although selected bond funds carry an annual platform fee of 0.2%.

Going forward, its key focus will be expanding its unit trust business and lowering the cost of investing further. “We are going to reach out to more people and will probably open more offices. Now, we are in Kota Kinabalu, Johor Baru, Kuala Lumpur and Penang. We are also looking at expanding our insurance capabilities,” says Wong.

The company is currently working with five insurance companies to list their no-commission products on FSM. The products were created in response to Bank Negara Malaysia’s push for insurance companies to offer direct, no-commission products to consumers.

“We have competitors who provide comparison services, but I am not too sure if users can buy insurance through them. We are licensed by Bank Negara and have a financial adviser licence, so we can sell the insurance products directly,” says Wong.

Over the years, more Malaysians are getting used to buying unit trusts and insurance products online, he observes. Many of them are also more informed and willing to put in the research to select their own products.

Wong has observed a change in the demographics of FSM’s investors. “Our investors are still mainly above 30 years old. But what was surprising when we looked at our database was that we have a growing number of female investors in the 18 to 35 age group. Previously, we had more male investors. I am not sure if this is because we ran a few more female campaigns and events in the past few years or that now, women tend to think more about investments,” he says.

“We think that historically, women did a lot of online shopping and looked more closely into insurance while guys did the trading. But this seems to have changed in the past two or three years.”

As online investing becomes common, more competitors may emerge. For instance, StashAway, which recently received its digital investment manager licence from the Securities Commission Malaysia, could compete with FSM’s managed portfolio business. The latter is an actively managed portfolio of unit trust funds that do not include exchange-traded funds (ETFs) yet.

Wong believes that the verdict on which could be a better choice is not out yet. “We have to take note that for Singapore and Malaysia, the risk-free asset should be local government bonds because if you buy US Treasuries [StashAway invests in ETFs that track US Treasuries] and if the ringgit starts to strengthen now, you will face a lot of foreign exchange risk,” he says.

“We do it a bit differently. We know that you have to do the fixed-income portion differently. So, for the Malaysian managed portfolio, we invest predominantly in Malaysian government bonds and corporate bonds. We take out that foreign exchange risk.”

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.