Unit Trust: Innovations in investment options

This article first appeared in Wealth, The Edge Malaysia Weekly, on December 28, 2020 - January 10, 2021.
Unit Trust: Innovations in investment options
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Unit trust fund managers have enjoyed strong inflows this year, even as the product sees unprecedented levels of competition from a host of new and emerging investment platforms. Nonetheless, unit trusts will continue to be the dominant form of investment for the foreseeable future, industry players tell Wealth.

“I think no matter how much we try to simplify the product and maximise our education efforts, there is just a baseline amount of complexity built into the investment landscape. That complexity cannot be avoided. And, ultimately, most retail investors want to be guided through their decision-making. That service is presently best expressed in the unit trust industry via an agency force,” Areca Capital Sdn Bhd CEO Danny Wong says.

“Much of the retail investor volume within the unit trust industry was built up and maintained by distribution agents, which remain a very strong force even today,” says Lim Tze Cheng, a Lipper award-winning fund manager and author of What I Learnt as an Analyst.

That said, he believes the most direct threat to unit trusts is not so much other asset classes as it is the stock market itself.

“I’ve found that investors tend to move directly into the stock market after they have built up some experience with unit trusts. So, it’s not so much a question of competition with other products as it is a question of market substitution (investors replacing their unit trust fund holdings with individual stocks).

“But even so, while a certain number of investors will be enticed away and move into some combination of direct stock market investments, or robo-advisories tracking local and international indices, a majority of investors will still prefer unit trusts as their primary investment asset.”

Meanwhile, Affin Hwang Asset Management Bhd chief innovation officer Allen Woo believes that what investors want are results, and to that end, there are now many ways they can go about getting it.

“We have always believed our core strength is in delivering results to our investors. The advent of exchange-traded funds (ETFs) and fintech has demonstrated that there are alternative channels for investors.”

Much of that choice has come by way of technological disruption, resulting in a string of low-cost investment platforms entering the local investment scene.

Naturally, this means that Malaysia’s unit trust incumbents have more competition than ever for the investor’s attention span.

For his part, Wong welcomes the competition. “I think it’s great that investors have all these options, as we always advise them to diversify anyway. But with all due respect to the platforms that are now providing options such as equity crowdfunding (ECF), peer-to-peer (P2P) financing and robo-advisory services, they are referred to as alternatives for a reason.

“By this, I mean that the ‘serious money’ does not flow into alternatives purely on the basis of the ultra-low-cost nature of their offerings. Our investors, the bulk of whom occupy a higher earnings strata, do not look at products purely because it is low cost.

“There is a difference between simple cost savings and the total overall returns on investment. There is no point saving money on an ETF tracking a losing index and, therefore, costing you your investment capital.

“On the other hand, suppose I charge you 1% per annum on 20% returns a year. A savvy investor will gladly pay the 1% fee because at the end of the day, it’s not about the cost but, rather, the value he receives in return.”

Super apps an interesting disruption

With a slew of non-traditional tech players gearing up to enter the financial services space, Wong sees the so-called “super apps” bringing yet another layer of disruption and competition to the investment landscape.

With Singapore having recently extended digital banking licences to Ant Group, a Grab-Singtel consortium, and SEA Ltd, it is only a matter of time before such licences are announced in Malaysia. “I think these super apps have a distinct advantage from a big data analytics point of view. They have the ability to pull countless data points and build patterns of behaviour for large segments of consumers. They then leverage these insights to advertise products and services to their users.”

But these players, Wong says, have much to do to convince the public to trust in their services. Case in point, he points out, was the dramatic, eleventh hour freeze of Jack Ma’s Ant Group’s mega IPO.

Ant owns and operates Alipay, one of China’s most popular financial services apps. It provides a range of services, from wealth management to micro loans, and even sells financial technology to enterprises, according to a recent CNBC report.

“I think Chinese regulators had major concerns about the extent of shadow banking. One of the regulator’s main concerns was that Ant quite clearly provided a range of financial services to users at large, without actually falling within the country’s appropriate financial regulatory ambits.

“They might have been worried that a possible subprime loans crisis was brewing, and the possible implications if the loan provider ended up going public.”

The issue of shadow banking and subprime loans in the Chinese financial services landscape is not new. Over the last year or two, this exact worry precipitated a near unprecedented, government-led clean-up of China’s burgeoning P2P financing space.

In fact, the China Banking and Insurance Regulatory Commission includes online P2P financing in its definition of the term “shadow banking”, according to Nikkei Asia.

All these, according to Wong, make a very compelling case for a Bank Negara Malaysia and Securities Commission-led oversight of super apps, as and when they enter the local financial services and investment landscapes.

“If these super apps are able to clear all the regulatory hurdles set out by the regulators, it would lend more confidence to the market about their stability and long-term involvement in financial services.”

Even so, Wong reckons these tech giants will eventually grow to become formidable financial services players. For all their big data prowess, however, Wong believes he and his fund manager peers have a distinct advantage over the super apps. “We fund managers have not spent the last few years sitting around doing nothing,” he quips.

While the super apps are highly adept at building insights based on historical data, what they cannot yet do is forecast market conditions. This, according to Wong, is a specialty of active fund managers, particularly in this part of the world where active managers generally outperform the market.

“For us in particular, we have spent many years honing our skills. For example, we could see in February that the pandemic was going to have a serious impact on the local market. We reached out to our stable of investors and advised them to deposit funds with us, which we would then use to capitalise on the meltdown.

“Soon after, we proceeded to exit many of our positions and build up cash, and once the market crashed in March and April, we re-entered in a big way.”

Over the longer term, Wong sees the possibility of harnessing these super apps’ big data capabilities to bolster Areca’s own forecasting and advisory work. “I do think that at some point, we fund managers are going to be able to harness that historical big data analytics to apply to our own processes, which would then create even more accurate and compelling forecasts. I believe the broad market is gradually heading towards that hybrid model of big data historical analysis and forecasting.”

Convenience for the retail investor

Affin Hwang Asset Management is no stranger to innovation, and its digital advantage paid off in a big way this year, says Woo.

“Speaking for ourselves, we are in a better position today compared with when we started the year. The total assets under administration grew 16.8% from RM57.7 billion at the start of 2020 to RM69.9 billion as at Nov 30.”

According to Woo, in addition to inflows from institutional business, Affin Hwang saw strong inflows from the retail market segment. “Many retail investors are opting for better returns by looking to invest in unit trust funds rather than keeping [their money] in savings or fixed deposits (FDs).”

Woo adds that Affin Hwang has been working on the imminent launch of its mobile app, Allocate Plus. “We see it as a bridge to enable us to reach out to a wider group of investors who are looking for ways to start their investment journey but are not quite sure how or where to start.

“Among the new features that will be offered through the app are the ability to open a new investment account and the flexibility to transact unit trust funds, as well as private retirement schemes (PRS) that are managed by us.

“The importance of saving and investment has been brought into sharp focus this year, and in that regard, Allocate Plus will be a springboard for investors to start their investment journey with relatively smaller outlays.”

Affin Hwang has had a good record of releasing new investment products in recent years. The advent of passive investing saw the fund house develop and list no fewer than eight ETFs on Bursa Malaysia, says Woo. “We have sought to give investors the convenience of getting into investment assets that are harder to access, such as gold and US tech stocks.”

A play for FDs, savings accounts

A very interesting innovation to come out of Affin Hwang in recent months was the announcement of a strategic partnership with Versa Asia Sdn Bhd, a local cash management fintech start-up.

At its core, Versa will allow retail investors and ordinary Malaysians to tap money market funds more easily. These instruments have historically been inaccessible to the mass market.

The service essentially revolves around a cash account that boasts FD-like interest rates and savings-account-levels of liquidity. If the service takes off, it could well end up disrupting the FD and savings account markets, arguably two of the most fundamental financial products presently available.

“This new digital cash management solution will soon be made available through a mobile app that will help Malaysians get the most from their idle cash,” Woo says.

While cash management solutions as a concept is not new, what is compelling is Versa’s ambition to create instantaneous, daily use cases for its service.

Versa founder and CEO Teoh Wei-Xiang says the service, which is being beta-tested, is meant to provide a third option to banking users. “We want people to know that there is a very low-risk, high-liquidity, interest-bearing option in which people can park their cash.”

For the first few years of this partnership, Teoh hopes to encourage users to get into the habit of depositing cash into these money market-linked accounts, which they would then utilise in much the same way that they do regular e-wallets.

“Our priority right now is to provide a lot of everyday use cases for this money market account. We want to get people to use the service with their favourite merchants. That is how we envisage building loyalty around the service.”

Over the longer term, that is, at least two years down the line, Teoh and his team will be working with Affin Hwang to gradually introduce various investment offerings on the cash management account.

“We chose to focus on developing daily use cases ahead of building out investment products and services because we thought it was very important for us to first build trust and loyalty into the user base. And then, over the longer term, we will definitely want to capitalise on our partnership with Affin Hwang.”

Affin’s Woo is excited about the potential in this partnership. “We believe the partnership with Versa will allow us to penetrate new market segments, particularly with a new generation of investors who prefer more convenience and less hand-holding. This would help grow and diversify our own investor base to create new revenue streams.”

Difficult times ahead for the agency force?

If nothing else, the Covid-19 pandemic and the ensuing rounds of economic shutdowns have demonstrated that retail investors can more than hold their own in difficult times.

“After decades of education, awareness campaigns and investor outreach, I think 2020 has been the year where it all finally paid dividends, so to speak,” says Dennis Tan, managing director of iFAST Capital Sdn Bhd.

“This year, we have finally seen retail investors at large adopting sound investment practices, going in low, selling high and not giving in to impulse,” he adds.

But that is not all, he notes. This year, iFAST, which runs online investment platform Fundsupermart (FSM), saw in excess of 200% increases in transaction volumes and new account openings. What’s more, Tan believes this broad shift to online channels will persist, even after an effective vaccine is distributed throughout the population.

This, he says, could call into question the long-term prospects for the unit trust agency force at large. He believes technology has effectively put the traditional commission-based model of unit trust distribution at risk.

“Our previous experience with mass-market investors is that those who had long relied on offline and agency channels and subsequently went online with us are very unlikely to go back. What we have found is that investors who go online find the experience to be very convenient, cost-effective and more transparent.

“This year, we have onboarded a record numbers of investors, and I believe that momentum will continue in 2021. We have also noticed more and more fund houses developing digital channels to enable investors to deposit money directly with them.

For Tan, perhaps the most telling sign of the diminishing prospects for the unit trust agency force is the Employees’ Provident Fund (EPF) i-Invest scheme. This is the EPF’s digital investment platform, which allows members to invest a portion of their EPF savings into selected unit trust funds.

Sales charges and commissions have been gradually eroding for some years now, and this has also been the case with the EPF’s i-Invest service. “Just a few short years ago, local agents could get away with a 5% or 6% sales charge. A couple of years ago, the EPF capped the sales charge at 3%, and then dropped it further to 1.5%. And then during the pandemic, the EPF zeroed it altogether.”

Going forward, Tan believes the agency force will need a widespread change in direction and approach towards investors. “Investors today are much savvier than they were in previous years. They are now well aware of the impact of sales charges on the long-term performance of their investments.

“Product pushing is no longer a viable strategy on its own. Unit trust agents are going to have to upgrade themselves and convert into licensed financial planners. They will gradually need to move away from the commission-based model of delivery, gradually integrating a fee-based advisory service for their clients.”