Malaysia deregulation meets mixed response

Fresh liberalisation instigated by the Malaysian government to open out the country's domestic funds industry has met with a mixed response both at home and abroad.

In June, authorities moved to allow 100% foreign ownership of unit-trust companies in Malaysia. Previously international firms had been restricted to owning 49% of a firm through a joint venture.

One of the chief aims of lifting the restriction was to encourage new entrants from abroad to set up in Malaysia in the expectation that they would drive competition and stimulate the domestic market.

However, some have questioned the timing of the move, coming shortly before the Asean fund passport is due for launch at the start of next year.

The passport scheme – being finalised between Malaysia, Singapore and Thailand – will enable a firm with a presence in any one of those signatory nations to cross-sell into another one.

That would likely see international firms favour Singapore as a larger funds market, without the need to establish a separate presence in Kuala Lumpur.

Aberdeen Asset Management is one such firm which is considering whether to apply for a unit-trust management licence in Malaysia, or simply to go down the passporting route.

Gerald Ambrose, the firm’s Malaysia chief executive, points out that Malaysia is limited from the perspective of sheer size, with a population of 30 million, half that of Thailand, a third that of the Philippines and minor next to Indonesia’s 245 million people.

Moreover, the domestic market is already subject to intense competition. Local companies such as Permodalan Nasional, the country’s largest asset manager with RM255 billion ($80 billion) in assets and 11.6 million account holders, have an entrenched head start.

Other significant players include Public Bank subsidiary Public Mutual, which can draw on its parent’s retail banking network and its own 40,000 unit trust agents to distribute its products.

“It would be difficult for us to break into the market, with all the tied agents that they have,” Ambrose conceded.

Of course, one strong argument for setting up in Malaysia is to tap the growing Islamic finance market. Ambrose pointed out that institutional investors are its main focus, with shariah-compliant retail funds a small, but growing segment. As such, setting up a unit trust company in Malaysia is not an urgent priority for the firm.

Aberdeen AM is targeting the distribution of wholesale funds to Malaysian high-net-worth investors with more than RM3 million, which it could do via Singapore through the Asean passport scheme.

As such, given the market’s size limitations, domestic competition and the pending passport scheme, Ambrose says of the new liberalisation: “I don’t think it will lead to a massive influx of [foreign] fund managers coming [to Malaysia].”

However, Ambrose did agree that the ability to own 100% of a business would increase confidence.

One consultant, who preferred to remain anonymous, pointed out that having greater control of their JVs would boost product and business innovation and enable firms to take on more risk.

Before the reform was officially announced, the government had permitted some foreign players to buy out their local partner. For example, Manulife bought out its local partner MAA Group last November in its MAAKL Mutual joint venture.

The consultant asked rhetorically: “Do organisations talking about their deepest investment strategy really want to have third-parties sitting on the board?”

At the same time, domestic players are privately concerned that if foreign fund houses do decide to enter the market, their greater financial clout will enable them to attract the best investment and services staff.

Pointing out that the supply of skilled labour in the country is limited to start with, Ambrose noted: “The theory goes that local players are worried that foreign players with more financial clout would poach all the good people.”

The counter argument is that any such move would spur consolidation, creating a leaner and more efficient market. “Over the past decade, a number of insurers that had been struggling with bad underwriting risk from years back were acquired by multi-national names. The same may happen in the unit-trust industry,” said Ambrose.