PETALING JAYA: More Malaysian fund managers are investing outside of the country in search of stronger returns, to the tune of RM329bil or one-third of the total assets under management (AUM) in 2023.
This compares starkly with the pre-pandemic 2019 level when the value of funds invested abroad stood at about RM200bil or less than 25% of the total industry AUM.
The rising tendency to invest abroad, amid a declining share of active non-strategic investors in the local stock market, has raised concerns about the impact on trading liquidity.
As it is, the liquidity on Bursa Malaysia is weak, with the average daily value (ADV) traded recorded below RM2.1bil in the past two years.
The weak ADV had taken a toll on the Securities Commission (SC), pushing it into a net operating loss. The regulator needs ADV to be about RM2.7bil to return to operating surplus this year.
Fund manager Danny Wong told StarBiz that fund managers have been increasing their foreign asset allocation even since the 1997 Asian financial crisis.
“Post-2018 general election, the political uncertainties in the country further caused fund managers to consider increased foreign investments.
“Politics aside, corporate earnings in Malaysia have been coming down on average since 2010.
“So, these reasons encouraged fund managers to look for offshore investments. The main factor is risk diversification,” he said.
Wong runs Areca Capital Sdn Bhd, a private fund management firm with a total AUM of RM4.18bil as of Jan 2024.
He also pointed out that there are “feeder funds” in the market, contributing to the rise in investments into foreign assets.
Feeder funds are basically funds that pool monies from local investors and “feed” the final amount into funds managed by established large global investment companies like BlackRock and JP Morgan.
“This causes outflow of funds and there is no value-add that allows local fund managers to improve their investment knowledge. This is because the actual investing is done by another party,” explained Wong.
TradeView Capital chief executive officer Ng Zhu Hann said Bursa Malaysia’s weak performance over the past several years played a big role in causing fund managers to invest abroad.
To put it into perspective, the FBM KLCI closed at 1,530.60 points yesterday, well below the historical peak of 1,895.18 points on April 19, 2018, some three weeks before the 2018 polls. The index represents about 80% of Bursa Malaysia’s total market capitalisation.
In comparison, during the same period since April 19, 2018, the S&P 500 index had risen by about 92%. The S&P 500 is one of the three main indices in the United States.
“If the fund managers don’t go abroad, they have limited growth opportunities in the local market. Markets like the United States and Japan offer higher returns.
“The investments in foreign assets also depend on client mandate. If clients want their money to be invested abroad, the fund manager will look for foreign assets,” he said.
However, he said the trend of investing abroad is not isolated to Malaysia as it happened in Singapore and Indonesia too.
Ng also noted that Malaysian private and government-linked funds had been increasing their investment exposure internationally.
The Retirement Fund Inc, which is the pension fund for public sector employees, has previously said that it wants to increase its foreign investments to 30% by 2025.
In the case of the Employees Provident Fund (EPF), about 62% of its RM1.14 trillion investment assets, as at end-2023, was invested domestically with the remaining in foreign assets.
Interestingly, the 62% domestic investments generated only 47% of EPF’s total investment income.
With global assets contributing the remaining 53% of 2023’s investment income, it showed the stronger return on investment from foreign assets.
It is also a clear indication of why fund managers opt to invest abroad.
However, Ng said foreign diversification would not necessarily guarantee higher returns compared with Malaysian assets.
Investments into Chinese equities in the past five years would have been loss-making, he added.
“The fund managers who had invested in China assets in the past five years are almost certainly in double-digit losses in percentage terms,” said Ng.
Meanwhile, Wong cautioned that fund management firms would suffer from “over-exposure” if their foreign assets are valued above the range of 20% to 25% of total AUM.
“There will be other risks such as currency fluctuations. Any allocation into foreign assets above 20% to 25% is not healthy,” he said.
According to the SC 2023 Annual Report, the Malaysia fund management industry’s total AUM hit a new high of RM975.5bil in 2023.
Of the amount, RM646.2bil had been invested in Malaysia, while 33.8% or RM329.3bil in global assets.
It is noteworthy that 61.4% or RM202.08bil of the amount invested outside of Malaysia went into equities.
The SC’ report also revealed that the share of investors with an active investment approach, both local and foreign investors, had decreased from 2018 to 2023.
There is a growing presence of both foreign and local strategic investors.
CIMB Securities cautioned that such a trend has the potential to reduce volatility in the equity market.
Strategic investors consist of promoters, parent or holding companies of publicly listed companies that had long-term investors. Non-strategic investors are investment managers with shorter-term horizons.
Since 2018, active non-strategic share of foreign holdings fell by 9.2 percentage points to 28.62%.
Active non-strategic share of local holdings, on the other hand, fell marginally to 15.23% from 15.98% in 2018.
“Overall, the composition of local investors remained stable compared with foreign investors.
“The Malaysian stock market could benefit from a rising share of strategic investors, both foreign and local, which provides stability during market downturns due to their long-term approach.
“However, this could also result in lower trading liquidity over time,” said CIMB Securities in a note.