All you need to know
about the Private
Retirement Scheme
A New Era of
Malaysian
Retirement
Savings
Ensuring greater savings for
retirement
Q&A with FIMM
CEO
See what FIMM has to say about
PRS
Insight INTO
FIMM’S 2012
ANNUAL
Convention
Growing confidently with change
PRS : What’s In
It For Me?
How PRS can brighten your future
PLUS
PRS : External Comment • Get The Low Down on
Ringgit Cost Averaging • Islamic Investing and SRI
UT today volume 10.2 2012
CONTENT
The Official Publication of the Federation of
Investment Managers Malaysia
Federation of Investment Managers Malaysia UT
Today is published twice a year by the Federation of
Investment Managers Malaysia (FIMM). Opinions and
views expressed in UT Today are solely the writers’ and
do not necessarily reflect those of FIMM. The publisher
accepts no responsibility for unsolicited manuscripts,
illustrations or photographs. All manuscripts and
enquiries should be addressed to:
II
BOARD OF DIRECTORS
• Abdul Kadir Kassim
• Datuk Meriam Hj Yaacob
• Datuk Siti Hadzar Mohd Ismail
• Datuk Wira Jahaya Mat
• Dato’ Idris Kechot
• Dato’ Mohamad Ayob B Abu Hassan
• Prof. Dr. Saiful Azhar Rosly
• Dr. Sieh Lee Mei Ling
• Danny Wong Teck Meng
• George Yap Koi Ming
• Ho Seng Yee
• John Campbell Tupling
• Muhamad Umar Swift
•
•
•
•
Nor’ Azamin Salleh
Teng Chee Wai
Vasantha Punniamoorthy
Yeoh Kim Hong
ADMINISTRATION
• Shalini Nair
• Zahurin Sulaiman
• Harkiran Kaur
EDITOR’s NOTE
UT today volume 10.2 2012
There is just about a month left to 2012, but it’s surprising what can happen in a mere 31 days or even 31 hours. The
financial industry, however, can be a lumbering behemoth. I know this because some of my best friends are bankers and
they impressed upon me time and again the importance of constancy.
That said, however, the unit trust subsector of the financial industry can look forward to an exciting month ahead. Most of
UT Today readers or participants in the industry should be well aware that this is the month where the Private Retirement
Scheme (PRS) takes its last look at the nest before launching off to grand new heights.
Consultants and providers alike should be buzzing at this prospect – a new arena has just opened up in what may be a
game-changing development for the industry. And all for a noble cause – PRS isn’t simply about flogging a new product;
it’s about changing the way Malaysians save and plan for some of their most important years of their lives.
The only constant is change.
-- Heraclitus, Ancient Greek Philosopher, 500BCE
Editor’s Note
The numbers don’t lie. Many Malaysians, if not a majority of them,
simply don’t have enough to live on during retirement with their
EPF or pension contributions alone. Numbers show that the
average Malaysian has saved about RM150,000 in EPF for their 20
years of retirement, and that works out to a paltry per-month figure
that doesn’t even cross the Malaysia poverty threshold.
And if that’s not enough to convince anyone to subscribe to PRS,
there’s 3,000 reasons for them to do so, namely in the form of tax
relief. PRS subscribers can claim an additional RM3,000 (above
their RM6,000 relief from EPF contributions) and, as one provider
said to me, anyone with an income should be interested in this.
But, again, this is change. Change is difficult. Change is
uncomfortable. How do consultants convince their clients that the
PRS, beyond any other product they sell, is truly for the client’s
sake? How do providers maintain that fine balance between the
good-in-itself of the PRS scheme while maintaining profitability?
Let’s not fool ourselves. There will be teething issues and there will
be complaints. And it is indeed foolish for anyone client, consultant
or provider to jump into anything new with eyes closed and hands
tied behind their backs. But it is similarly foolish to simply believe
that things will work themselves out and that we can ignore all that
is unfamiliar.
All that is to say – preparation is key. Whoever you are, the question
you have to ask yourself is: are you ready for PRS? Do you know
what it entails? Why is it necessary? What do you have to do to
enjoy its benefits? How do you subscribe? With some luck, this
issue of UT Today should prepare the reader to answer most, if not
all, of these questions.
This issue of UT Today also provides comprehensive, but not
exhaustive, coverage of the FIMM Convention, which was held
last October. This annual convention is an important part of all
industry participants for a number of reasons, but perhaps what’s
most important are the lessons and contacts that are built at these
events.
The panel discussions were thorough: are you aware of your
role and responsibility as an ethical unit trust consultant? Are
you making the most of the opportunities presented by the rise
of Islamic products? Are you ready to take advantage of the new
paths opened by PRS?
The point is, if you weren’t there, you probably missed out. But
fortunately, there are recordings and also extensive coverage in
the pages of this issue. We also feature contributions from key
industry players about the macro economic outlook, the rise of
Islamic finance and some tips on how to advise your clients.
So, even in the midst of the exciting new developments in the
industry, there are still some things that require the same amount
of attention for continuous development. Change is change, but to
throw the baby out with the bath water in the name of change is
similarly foolish.
The next 31 days will set the stage for what ought to be an even
busier and more exciting 2013, and I hope that everyone is helping
PRS stride forward with a solid footing. Meanwhile, UT Today
is reshaping itself to become a more relevant publication in the
coming year, so even we are undergoing some change as well.
In light of this, we would welcome any feedback from our readers
as to how we can improve this publication. Do send us your
comments or any professional queries that you might have, and
hopefully we’ll be able to address these concerns in our next
publication out in 2013. Ahmad Zakie bin Hj. Ahmad Shariff
Chief Executive Officer
1
2012 UT Annual Convention
UT today volume 10.2 2012
FIMM 2012 Convention:
G row in g Conf idently With C hange
“As the world
continues its
cautious and
slow recovery
from the global
financial crisis, it’s
quite gratifying
to know that our
unit trust industry
has continued to
grow despite the
turbulence. Hence,
it is only fitting
that “Growing
Confidently with
Change” was
chosen as the
theme for this
convention.”
Ahmad Zakie,
FIMM CEO
With the Private Retirement Scheme (PRS) promising to go into
full-swing before the end of 2012, the key message at the FIMM
annual convention held last October was for its members to
prepare for change.
Indeed, convention participants heard from a panel of experts
as to how and why the advent of PRS is looking to significantly
change the landscape of Malaysia’s capital market.
The keynote address for the convention this year was delivered
by the Securities Commission’s (SC) Executive Director, Goh
Ching Yin, who reminded conference participants about their
role as investment advisers.
“This year’s convention theme is growing confidently with
change, which speaks to the saying that the only constant is
change itself,” Goh said.
“In this context, it is important to recognise the challenges
arising from a rapidly changing financial landscape and the need
for the industry to play a more assured role in providing reliable
investment options for the average Malaysian”.
Goh emphasised that while the PRS was an important
development for the industry, there remained other industry
issues that everyone involved, from the individual consultants all
the way up to the regulators, should prepare for. (Please see the
Highlights of the Keynote Address section).
Meanwhile, convention participants also heard experts
testimonies on the growth of opportunities in the Islamic
finance market, the need for greater professionalism and ethical
behaviour, as well as a special presentation on the changing
business environment in Malaysia and around the world.
The FIMM convention is an important annual event that sees unit
trust practitioners from all levels from consultants to providersmeet to discuss and share experiences. The 2012 convention
was held at the Sime Darby Convention Centre on Oct 9th.
2 UT today volume 10.2 2012
The following sections give a brief summary of the
key points discussed during each panel, but are not
exhaustive.
Panel Discussions
2012 UT Annual Convention
In addition, Goh Ching Yin from the SC said,
employers could take advantage of the PRS as
an employee retainment mechanism by providing
additional benefits for the employee while enjoying
tax relief at the same time.
Panel 1: The Introduction of PRS and Its
Impact on the Unit Trust Management
Industry
Highlights of the Keynote
Securities Commission
The advent of PRS promises to change the landscape
for the country’s retirement and unit trust industry,
and consultants will be kept busy when the funds are
launched in November. Providers and consultants
alike will be faced with new sets of challenges as
there will certainly be accompanying teething pains.
The keynote address by SC Executive Director
Goh Ching Yin touched on a broad spectrum
of subjects related to the industry. The full text
of his speech is too long to reproduce here
although a copy can be found at the SC’s
website. Some salient points that all unit trust
consultants should be aware of are noted below :
The biggest challenge, said Campbell Tupling,
the CEO of CIMB-Principal, will be convincing the
investing public that the PRS is not a substitute
for EPF or other retirement savings plans, but
complements them.
“People are going to be asking, ‘What’s the best way
to save for retirement? The Employees Provident
Fund (EPF), Real Estate or PRS?’ And the answer is,
all of the above,” Tupling said.
“Our biggest challenge as an industry is to make
them work together to create the opportunities for
people to save for retirement. They’re all different
and they play their role...how do we get the message
out there that these tools work together and not
against one another?”
Tupling said that the investing public in other
countries have been very interested in retirement
plans similar to PRS, but the key in Malaysia is to
raise as much awareness as possible about the new
saving scheme.
The point to keep in mind with PRS is that it is
significantly different from the other so-called
retirement ‘pillars’, i.e. the government’s social
welfare being the first and EPF the second. PRS is
voluntary and trades the tacit guarantee of capital
protection for potentially higher returns.
Manulife’s CEO, Edward Ooi said Malaysians had a
prevailing mind-set that EPF savings was sufficient
in-itself for retirement, but this has to change. The
tax incentives accompanying the PRS would help
accomplish this goal, he added.
“The first few years will be very difficult years for
providers,” Ooi said. “We need to provide a lot of
education for the investing public. (The plan) is
unique here (in Malaysia) because of the tax-relief
provided by the PRS. Every Malaysian should take
advantage of it.”
Address by
• Malaysia’s capital market has tripled in size
over the last decade to its current size of RM2.4
trillion; liquidity remains ample, and the total
size of the investment pool exceeds RM1 trillion
• Unit trust funds have grown from 43 funds in
1993 with a total NAV of RM28.1 billion to 587
funds at the end of 2011 worth a total RM249.5
billion; unit holders accounts and penetration
has grown from 5.3 million and 4.5% in 1993
to 15.4 million and 19.4% in 2011
• FIMM was established as a self-regulatory
organisation in 2011, complementing SC
efforts to ensure a more efficient and effective
regulatory framework for the industry
• The SC’s Capital Master Plan 2 envisages unit
trust NAV to hit RM827.9 billion by 2020
• New regulatory efforts have been introduced
to further increase product diversity, and the
introduction of PRS will help drive this forward
• PRS will also help develop Islamic unit trust
market thereby further reinforcing Malaysia’s
position as a market leader for Islamic finance,
which presently accounts for about 10% to
11% of Malaysia’s total unit trust NAV
• The Malaysian unit trust industry needs to
prepare itself for the creation of an integrated
ASEAN capital market by 2015; the creation
of an ASEAN Collective Investment Scheme
will provide opportunities for cross-border
investments within the region
• In order to sustain growth, there needs to
be greater investor education to empower
investors with the ability to understand and
invest in more sophisticated products
• Unit trust consultants have to ensure they
are wholly aware of the products within their
portfolios as well as market movements in
order to better serve the investing public
3
2012 UT Annual Convention
Hwang Investment Management Bhd’s CEO, Teng
Chee Wai, told the convention that he expected the
early years of PRS to be difficult, but that this could
change in the long-term if the providers could prove
themselves to be successes.
“We must look at it at long-term while having the faith
that one of these days, (PRS contributions) will be
made mandatory like Hong Kong,” Teng said.
“Meanwhile, all the providers will have to prove that we
are worthy of managing long-term assets. We have to
prove that we are credible and transparent in order to
win over public interest and confidence.”
He added that the PRS was a long-term investment
plan and that the entire industry, including consultants,
cannot only focus on the immediate-term.
All providers will have to
prove that we are worthy of
managing long-term assets.
Teng Chee Wai,
CEO Hwang Investment
Management Bhd
Panel 2: Identifying Opportunities in the
Islamic Unit Trust Landscape
Despite Malaysia’s status as one of the key Islamic
financial markets around the world, the development
of the Islamic unit trust industry has not kept pace with
its conventional counterpart. According to data from
the SC, Islamic unit trust represents only about 10% of
the total Market.
The prevailing message at the panel discussion during
the convention was the viability of taking Malaysian
Islamic funds outside of Malaysia to market to a wider
audience. Islamic assets, the panel member said, had
potential but needed to seek a wider market, which
would spur product and client diversification.
Datin Maznah Mahbob, CEO of AmInvestment
Management Sdn Bhd, said that Islamic unit trusts
have come a long way since the inception of the
business, offering a wide variety of funds that are no
longer just plain vanilla sukuk or equity funds.
One advantage for the Malaysian business is the
change in the “economic dynamics” owing to the past
financial crisis is changing in Malaysia’s favour.
“Because of the global financial crisis, many of the
global houses, banks for example, are disaggregating,”
she said. “In fact, many banks and insurance companies
4 UT today volume 10.2 2012
have sold off non-core business which includes asset
management business.”
This not only translates to talent, but also a reduction of
competition in the fund business, particularly in Islamic
finance. This lacuna caused by the changing dynamics
offer Malaysian Islamic fund companies an opportunity
to thereby market to a much broader audience beyond
domestic shores.
The aim is not for us to fly
the Islamic flag. The idea
is to give the same sort of
investment process and
return as our conventional
peers have enjoyed in
a Syariah compliant
version.
Abdul Jalil Rasheed,
CEO Aberdeen Islamic
Asset Management
Abdul Jalil Rasheed, CEO of Aberdeen Islamic Asset
Management, said that his management company
does not approach Islamic funds that differently from
conventional funds. However, he acknowledges that
there are great opportunities available for the nascent
industry.
“The aim is not for us to fly the Islamic flag,” he said.
“We are not moral guardians. The idea is to give the
same sort of investment process and return as our
conventional peers have enjoyed in a syariah compliant
version. Our aim is to give investors where we are based
the opportunity to buy funds available elsewhere in the
world.”
“For us, we look at Islamic fund management as we
would manage a conventional fund. The portfolio
composition and operational element is different but
we draw on the same expertise.”
Abdul Jalil said that selling Islamic funds beyond
Malaysia may take time, as there is still insufficient
knowledge on the part of the investing public. He added
that there also needed to be further development in the
regulatory framework before the industry can take off
on a larger scale.
Meanwhile, Anthony Siau, Principle Officer (Acting),
RHB Investment Management said that Islamic
finance remained a key part of the group’s business,
so much so that it will feature as a key component in
the bank’s expansion plan.
UT today volume 10.2 2012
RHB Investment Management is presently in an
advanced merger discussion with OSK Investment
Bank, and will likely see its business expanded to seven
new countries once the deal is done.
“All of it will include Islamic finance, and in certain
countries that will be a huge part of it, but in other
countries a window (of opportunity),” he said.
Suhaizi Reza, the Senior Manager for Global Sales and
Marketing of CIMB-Principal’s Islamic Asset Management
arm, said that though Malaysian Islamic bankers are keen
to bring their products overseas, they have to be wary of
underlying obstacles. Doing your homework, he said, was
essential.
“Let’s say for example in Malaysia, I can go to SC to
register my fund, and then every single bank in Malaysia
or every agent in Malaysia can sell the fund,” Suhaizi
said.
“But in Bahrain, if bank A wants to sell my fund, he
needs to bring my fund to the regulator to be registered,
and if Bank B wants to sell my fund, he needs to go to
the regulator again. The point is, we have to go to each
and every jurisdiction and study the market. It’s very
important to do your homework.”
To summarise, the panel members agreed that there
needed to be greater education of the investing public
regarding Islamic products.
Panel 3: Ethics and Code of Conduct for the
Unit Trust Consultant
The trustworthiness of a unit trust consultant is possibly
his or her most important asset, the panel participants
said, and must be protected at almost all cost. The panel
discussed various disciplinary issues that have cropped
up recently at the FIMM, and offered suggestions to
resolve them and keep them from reoccuring.
The relationship between an investor and a consultant
is a “fiduciary relationship,” said FIMM director and
a member of the Rules and Disciplinary committee
Vasantha Puniamoorthy, and should be treated in the
same way as the relationship between a doctor and
patient.
One recurring issue she said, was a tendency on the
part of consultants to flout the rules in the name of
convenience.
She said that even though a consultant may have
reached a verbal agreement with a client to expedite
certain processes, such as the monthly withdrawal from
the client’s EPF account to invest in unit trust, such
agreements don’t always hold up should a dispute arise,
even though the practices may be industry “norms”.
“My question (to the consultants) then would be, ‘Have
2012 UT Annual Convention
you got the instruction from the client in writing?’ The
answer has always been a no. In such a case, how do
we know that the client gave you those instructions and
the client is aware?” Vasantha said.
This standard of
professional conduct
provides a ground rule
that unites everyone here
so we all act in the same
manner. This provides
uniformity for the whole
industry…and gives us a
mental readiness of what
can and cannot be done.
Danny Wong,
CEO Areca Capital
Although this action expedites the process, the problems
begin when a dispute arises, and the client can then
claim that the withdrawals were being done without
their approval. The Code of Conduct forbids pre-signing
forms for issues such as these, thereby protecting not
only the client but also the consultant.
Danny Wong, the CEO of Areca Capital, said the Code of
Conduct issued to all consultants also played a practical
role in protecting individual consultants. He said that
the conduct ensures a uniform standard of behaviour
throughout the industry, which enables them to discuss
issues with clients in a similarly uniform fashion.
“This standard of professional conduct provides a
ground rule that unites everyone here so we all act in
the same manner,” he said. “This provides uniformity for
the whole industry…and gives us a mental readiness of
what can and cannot be done.”
“Clients are also similarly made aware of the limitations
and are protected by these two Codes,” Danny Wong
said. The Codes thus are a defence against specific
requests by clients who may be entirely profit-oriented
and make specific requests that go against ethical
behaviour.
At the same time, Wong Boon Choy, CEO of MAAKL
Mutual Bhd, said the Code of Conduct needs to
be further improved to address specific gaps that
consultants deal with regularly.
He points out two examples: first, how should a unit
trust consultant who distributes other financial products
such as insurance designate himself or herself? There
5
2012 UT Annual Convention
is presently a restriction on designation in the Code
of Ethics, but there are progressively more and more
consultants who handle various asset classes.
Second, the Code of Conduct does not provide for
situations where the interest of the client conflicts
with certain restrictions. For example, Wong Boon
Choy said, what happens in a situation where a
client wants to diversify his or her portfolio to include
a product not offered by their existing consultant?
The norm presently is for the consultant to appoint
a nominee agent to execute the transaction, but this
is very much a ‘grey area’ under the Code of Ethics.
UT today volume 10.2 2012
tied to the asset class of the fund.
“For example, there comes a time when a consultant
may feel that he needs to move his client out from an
equities fund into a money market fund,” he said. “But
when he does that, his trailer commission immediately
drops drastically, and to his mind, it is a disincentive.”
“We have to realise that the UT landscape has
changed,” Wong said. “And the question is how do
we address ethical issues like that?”
It is thus difficult for a consultant to put the client’s
interest first, which is required of the Code of Conduct
and Ethics, without simultaneously disadvantaging
himself. The question is how those two interests can
be aligned together thereby minimising the potential
for unethical behaviour. Wong Boon Choy suggested
that a revision of the compensation plan to make it
more similar to the fee-based scheme may be helpful
in this regard. Another issue has to do with the issue of
compensation, he added. Unlike other markets where
wealth planners and advisers are allowed to charge
a fee for selling unit trusts, Malaysian consultants
are not. Rather, they earn a trailer commission that is
The key takeaway from the panel discussion is that
the Code of Conduct and Ethics remain strong pillars
of support for unit trust consultants, but nonetheless
may require change going forward if it is to remain
relevant in the evolving landscape.
Special Presentation: Leading Through
Change
The key message from the presentation by
Capital Group Asia’s group CEO Douglas Dean is
straightforward: the business landscape is changing at
an exponential rate, and individual unit trust consultants
must adapt or risk falling behind.
The change is at once a function of technology and
of globalisation, which has made the marketplace a lot
smaller and more competitive. Indeed, Dean said, the
virtues that used to make good companies great just a
short 10 years ago may no longer apply as much today.
To illustrate his argument, Dean pointed to a study
conducted by Jim Collins in his influential 2001
management book, Good to Great. In his book, Collins
identified 11 of the supposed “best companies” in the
world of which only two survived or are performing well
today.
In their place now are the Facebooks and Googles
of the world, which can be no farther away from the
traditional businesses of commerce, retail and industry.
“The entire market has completely and utterly shifted.
We’re no longer in the reality we were brought up with,”
Dean said. “By and large, we are looking at a completely
different dynamic that we were ever expecting over the
last 10 years. Things have rapidly changed.”
“We have to think about a whole new line of thought.
Life used to be linear and predictable. The last three to
four years, from an outsiders perspective, things are no
longer what they used to be. Models we used to apply
to no longer apply.”
6
Based on the model he presented, the global
marketplace is transitioning from a “complex” economy
into a “chaotic” one where there will be greater and
greater levels of uncertainty. Models that try to control
them will ultimately fall apart, and business owners
need to adjust to that new reality.
As the business marketplace becomes more and more
complex, Dean said, the level of expertise required to
perform a job to competitive standards increases as
well. So much so that it is now almost impossible for
any single individual to perform in a whole variety of
tasks.
“Collaboration is the only way forward,” Dean said. “It’s
the only way that we can get to that level of expertise
(about 10,000 hours of practice) required.”
In order to adapt, he said, business has to change and
that means taking a number of steps such as being
more open to collaboration and making better use of
social media tools. Digital networking has become
more important than ever, hence the successes of
Facebook and Google and there is thus a need for
business owners to leverage on them.
Teamwork is also becoming increasingly more
important specifically in the sense where everyone,
including the boss, pitches in with their own areas of
specialisation, Dean said. The top-down approaches
that are used by bigger companies are in danger of
falling apart.
Change is the new paradigm going forward, he
suggested, and though there needs to be preparation
to anticipate that change, the how of those preparations
may be more important than the what.
Focus on Industry
UT today volume 10.2 2012
John has been working as a middle-line manager for the past 35 years, but as retirement looms, he finds himself
worrying whether he has enough saved up in his Employees Provident Fund (EPF) account for the future.
John is a 53 year-old bachelor with no children, and has about RM200,000 in his account. He has some savings
and has contributed to a medical insurance policy for the greater part of his working life, but assuming that he lives
till 75, that means he will draw a measly RM10,000 a year from his pension savings.
Even assuming that the money is reinvested and drawn down monthly with his savings, it is hard to imagine that
the amount will come up to much more than RM15,000 to RM20,000 a year at best, which means that he will have
to make do with between RM1,250 to RM1,650 a month.
“I’m worried, and I’m already making plans to continue doing some work part-time after I’ve retired,” he says.
“I have some friends who are professionals who can
still do some consulting work after retirement, but
I’m really not sure what I will be doing. I actually
wanted to travel more after I’ve retired but it looks
like I may have to delay that for the time being."”
PRS: A new era
of Malaysian
retirement savings
It’s with people like John in mind that the
government has launched the Private Retirement
Scheme (PRS) to encourage a higher savings
rate to help boost the amount of money saved by
Malaysians for their retirement. PRS, a voluntary
scheme, officially launched in June 2012, adds
further avenue for Malaysians to lock down funds
for post-work life.
As an added incentive, the government has thrown in tax incentives for both employees and employers to
encourage the take-up of the programme. For employees, contributions of up to RM3,000 annually is deductible
as personal tax relief. Meanwhile, employers will receive tax deductions for contributions to PRS up to 19% of the
employees’ total remuneration (inclusive of EPF deductions as well).
To put it in perspective, assuming a contributor starts putting in RM3,000 annually into the PRS at a conservatively
estimated return of 5% per year compounded annually, the contributor can expect his investment to peek over
RM150,000 in 25 years when he retires.
Year
Principal at start
Contribution (RM)
Average annual
of year (RM) return
Principal at
year-end (RM)
1
0.00
3,000.00
5%
3,150.00
2
3,150.00
3,000.00
5%
6,457.50
3
6,457.50
3,000.00
5%
9,930.38
4
9,930.38
3,000.00
5%
13,576.89
5
13,576.89
3,000.00
5%
17,405.74
6
17,405.74
3,000.00
5%
21,426.03
7
21,426.03
3,000.00
5%
25,647.33
8
25,647.33
3,000.00
5%
30,079.69
9
30,079.69
3,000.00
5%
34,733.68
10
34,733.68
3,000.00
5%
39,620.36
11
39,620.36
3,000.00
5%
44,751.38
12
44,751.38
3,000.00
5%
50,138.95
13
50,138.95
3,000.00
5%
55,795.90
14
55,795.90
3,000.00
5%
61,735.69
15
61,735.69
3,000.00
5%
67,972.48
7
focus on industry
Year
UT today volume 10.2 2012
Principal at start
Contribution (RM)
Average return
Principal at
of year (RM)
year-end (RM)
16
67,972.48
3,000.00
5%
74,521.10
17
74,521.10
3,000.00
5%
81,397.15
18
81,397.15
3,000.00
5%
88,617.01
19
88,617.01
3,000.00
5%
96,197.86
20
96,197.86
3,000.00
5%
104,157.76
21
104,157.76
3,000.00
5%
112,515.64
22
112,515.64
3,000.00
5%
121,291.43
23
121,291.43
3,000.00
5%
130,506.00
24
130,506.00
3,000.00
5%
140,181.30
25
140,181.30
3,000.00
5%
150,340.36
How does it work?
It’s no different from investing in unit trust funds. Contributors to PRS, in its present incarnation, are essentially
buying select unit trust funds from participating providers, and just like unit trust, these funds are divided into
different categories of risk.
At the initial stages, the funds from PRS will feed into existing unit trust funds until it develops some scale, at which
point specific funds will be created for the PRS.
Unlike EPF, which is mandated by the Employees Provident Act 1991 to declare an annual dividend of at least 2.5%,
the PRS does not make such a guarantee. However, contributions to PRS will be fed into funds that have historically
performed better than the 2.5% minimum, though participants should be aware that this is neither an implicit nor
explicit guarantee.
To ensure the safety of the contributors’ funds, regulations and appropriate supervisory framework have been
put in place. The PRS is regulated by the Securities Commission (SC) and administered by the Private Pension
Administrator (PPA), which will act as a central administrator of the PRS and other pension initiatives introduced in
the future.
Under the PRS Guidelines, PRS providers are to adhere to the prudential limits for funds within the Scheme.
Similar to the EPF, the PRS scheme is aimed at generating savings towards meeting individuals’ retirement goals.
Participants are thus matched with funds based on a pre-investment survey, or if no preference is given, they are
matched based on their age profile.
Older contributors could see their funds go into a moderate or conservative fund, which is less risky and provides
more sustained income. The table below indicates the profile of the different kinds of funds available under PRS:
Growth Fund
Age Group Below 40 years of age Moderate Fund 40-50 years of age Parameter Maximum 70% equities Maximum 60% equities Investment outside Investment outside Malaysia is permitted Malaysia is permitted Conservative Fund
Above 50 years of age
80% in debentures / fixed
income instruments of
which 20% must be
in money market
instruments and a
maximum of 20% in equity
Investment outside
Malaysia is not permitted
8 focus on industry
UT today volume 10.2 2012
PRS funds will be distributed by existing unit trust consultants and banking agents, although consultants will
need to be registered as PRS distributors with the Federation of Investment Managers Malaysia (FIMM) before
they can do so.
PRS ensures investment flexibility
At any point in time, participants may choose more than one PRS Provider or contribute to several funds.
Participants have the option to switch funds within the provider throughout the tenure of the investment or
change to another PRS provider. In some cases, this could
involve penalties such as fees and lock-down periods.
At the start, participants can choose to invest in an existing
pool of 24 core funds provided by the eight approved PRS
providers. They also have the flexibility of investing in the
PRS whenever they want to enjoy the tax benefits. For
example, the investment could be made on Dec 31 in one
lump sum to enjoy the tax relief the following year when
filing taxes.
As with all pension schemes, some limitations are imposed
on the early withdrawal of funds as the main objective is
to ensure that pensioners have greater access to funds in
their twilight years. As such, participants are only allowed
to withdraw 30% of their investment annually should they
find the need to do so, and the remainder will only be freed
up at 55 years of age, death or emigration.
Unlike the EPF, the PRS contributors have this discretion to
choose from various funds with appropriate asset allocation,
depending on investment objectives. Other differentiating features are highlighted in the following table :
Feature Differences
PRSEPF
Contribution Type
Voluntary
Mandatory
Contribution Amount
No statutory minimum or maximum
Statutory minimum (For employees: 11% Employee,
12-13% Employer)
Contribution Frequency
No statutory interval
Statutory Monthly Contribution (for employees)
Contribution Paid to
Individual PRS Providers
EPF Directly
Yearly Personal Tax Relief
RM3,000 RM6,000
Partial Withdrawal
From Sub-Account B only, and 8% Tax Penalty Account 2 only, specific reasons no penalty
Selection of Fund Investments
Freedom of Selection
(among PRS Providers) Freedom only on Partial Amount (EPF-MIS)
Dividend Policy
No statutory minimum
(depends on Fund performance)
Minimum 2.5% p.a.
As for John, he says he wishes there was something like PRS when he had more earning power. “I don’t see why
I wouldn’t have participated especially since there was an extra RM3,000 deduction from taxes every year and
based on how unit trusts have done, I think it would have grown quite well,” he says.
Fortunately for John, he’s managed to secure some other source of income as a consultant post-retirement but
his success is the exception rather than the rule.
9
focus on industry
Private
Retirement
Scheme
What are the providers saying?
UT today volume 10.2 2012
Campbell Tupling, Chief Executive Officer
of CIMB-Principal Asset Management Bhd.
Everyone who earns an income should be interested
in this product. It’s a RM3,000 deduction annually
from your taxable income so it’s almost as if it were
free money. The flexibility of the PRS scheme is also
another huge advantage for savers. If contributors
have performance or service issues, they can opt for
another provider.
At the beginning, many of the PRS funds, not all, will feed into existing unit trusts. We have some flexibility
as to how to assets are allocated, but they are basically managed for a longer-term horizon. PRS funds are
managed for a 10-15 year horizon, not like unit trusts that look at about a 3-5 year basis, so we do manage
the fund differently.
There are three core funds each provider has to have. What’s important is they do have limitations based on
the type of fund, and people who don’t choose the fund they would like to invest in will be, by default, moved
along to (more conservative) funds as they get closer to retirement age. This is one of those things we learned
from the world looking at other pension systems. This is a way of ensuring some logical progression there but
for the people who want to choose, they can choose any fund they want.
With respect to concern over fees, we have to understand that the distributors have to make money. It’s
always a tricky balance because if you don’t have to pay distribution, and say there’s no money in the fee
structure for distribution, nobody is going to want to do it. That mistake was made in the UK where not
enough was allowed for distribution so nobody invested. But the argument is that the contributor should
make up for the fees in the long-run.
CIMB and Principal are very supportive of the PRS. We know it’s an investment that has to be made over the
next few years and we think it’s a good product that will sell well in the longer-term. Pension is something that
Principal has tremendous experience in and is a core product for Principal, so we will be bringing expertise in.
Steve Lim, Chief Product Officer of Hwang Investment Management Bhd
Private Retirement Scheme (PRS) benefits Malaysians in many ways. The most significant is in helping the
public save and prepare for their golden years. The life expectancy of Malaysians has increased to 71 for
males and 77 for females.
In addition, it is a known fact that 50% of retirees exhaust their retirement savings within five years of retirement
and 70% within 10 years. In short, many Malaysians are ill-prepared for a comfortable retirement.
The good news is that there is help now. With PRS, Malaysians are able to take charge of their finances so
they are prepared for a comfortable retirement years. PRS funds are purpose-built for investing in the longterm. The Securities Commissions Malaysia has outlined very specific requirements for these funds such
as the equity exposure, experience of fund manager as well as proof of stability based on the historical
performance of existing funds.
All these contribute to ensuring the stability and consistency of the fund’s performance and thus suitable for
retirement savings. It also caters to everyone, including the employees, self-employed and business owners.
With PRS, it empowers Malaysians to take control of their retirement investment as they now have the flexibility
to choose from the eight PRS providers and invest according to their expected returns and risk profile.
10
UT today volume 10.2 2012
focus on industry
For Hwang Investment Management, we believe PRS helps to open another floodgate of opportunities for us
to build our asset size. We are optimistic that PRS will be a success as it benefits the economy, society, capital
market and asset managers like us.
We are proud to be chosen, as assets generated from this business segment are sticky, in the sense it will stay
for the long-term. Once the momentum kicks in, this will enable us to grow our assets exponentially as there
will be a slew of new money that comes in regularly.
Edward Ooi, Chief Executive Officer of Manulife Asset Management Services Berhad
Given the alarming statistics on the aging population and ever-rising cost of living coupled with volatile financial
markets, there is an urgent call for Malaysians to save more in order to achieve a sustainable retirement
income.
Private Retirement Scheme (PRS) was designed to address the existing gaps in our retirement landscape and
provide an alternative platform for retirement fund building, including the two million self-employed working
adults that are not covered under EPF. With more investment choices, contributors will be able to mitigate
concentration risk and help safeguard their nest egg. This will ultimately improve the quality of living for many
Malaysians.
PRS is also seen as a great boost to Malaysia’s capital market. Contributions to the pension scheme would
provide an additional source of funding to stimulate economic growth and deepen the capital pool, which
leads to improved liquidity and efficiency of the market. For the providers, it is an opportunity for us to tap into
a whole new sector of the local market and widen our business portfolio.
While it is no easy task to build a whole new system and workforce for this new industry, it is definitely worth
to see the number of new talents brought up through the development and implementation of PRS.
Here at Manulife, skills and technology were adopted from some of our largest pension operators worldwide
that carry decades of expertise in the pension industry. By providing an easy-to-use and fully integrated PRS
system, we hope to encourage more Malaysians to save for their retirement.
11
focus on industry
Q&A: PRS and
the FIMM
The Federation of Investment Managers (FIMM)
has seen its regulatory role expanded to
include overseeing Private Retirement Scheme
(PRS) consultants. Though there are similarities
between the PRS and conventional unit trust
trading industries, consultants need to be
aware that they are not identical products.
A close up with FIMM’s Chief Executive
Officer Ahmad Zakie to get his views on the
regulator’s new role and what it means for the
industry in general.
UT Today: Why is there a need for PRS in
Malaysia?
Ahmad Zakie : According to statistics, Malaysia is
an aged country by 2023 with more than 12% of our
population is over 60 years. Given today’s demographic
challenges, increased life expectancy, and rising living
standards coupled with volatile financial markets, many
Malaysians find their savings inadequate to meet their
retirement needs. The main reason we came up with the
PRS is because there is a misguided notion that the EPF
(Employees Provident Fund) contribution that we make
until the age of 55 is sufficient for retirement. Based on
last year’s EPF report, the average total contribution for
a 54 year-old contributor to EPF is about RM170,000.
Assuming an average life expectancy of 75 years, that
gives you about RM400 - RM500 a month, which is very
low. In fact, it’s lower than the country’s poverty line of
RM730. If the focus is on EPF’s withdrawal only, then a
lot of our retirees are not going to have high-quality lives.
UT : Why do we need to introduce a new
infrastructure? Why not just enhance the EPF?
AZ : Because this is simply a different asset class.
First, we’re talking about voluntary, not mandatory,
contributions. Two, the PRS functions as a third
pillar of support for retired Malaysians in addition to
the social welfare provided by the government and
mandated EPF contributions. The PRS is also meant
for those not under EPF’s purview at the moment,
or about two million working adults. Some of them
are entrepreneurs with their own businesses that
contribute to EPF for their staff but not for themselves.
UT : What is FIMM’s role with respect to
PRS?
AZ : One, we have to make sure that people that go
about promoting the PRS are qualified. That means
they have to go through our qualifying examinations.
12 UT today volume 10.2 2012
However, there are exemptions if they fulfill certain
requirement.
Two, we have to make sure the PRS concept and
industry is promoted well. We have this misconception
that the EPF being the be-all and end-all; but it is
not and this is very sad. Even amongst some of the
wealthier groups who think that the RM300,000 or
RM400,000 they have in EPF is enough, but it is not.
A key part of our role in marketing PRS is to ensure
that the public have the proper education with respect
to the issues.
UT : Especially if you still have a family to
support...
AZ : Very much so. Malaysia is slowly ageing. As of the
last census, we have got about 7% of our population
above 60. By 2020, we will have 10% of our population
and by 2020, our population will grow up to 35 million
which means we have 3.5 million who are above 60 and
by 2030 we will be an aged nation. Furthermore, a lot
of our people are leaving it late to marry, so by the time
you’re 40 or 50, you have kids and you still have parents
so you’re sandwiched in between. And if you don’t do
your financial planning very well, you won’t be able to
afford to look after both.
UT : Will regulating the PRS be different from
regulating the UT industry in the past?
AZ : Not very different because the mandate given to
us by the Securities Commission and the authorities is
UT today volume 10.2 2012
basically to make sure we regulate the marketing and
distribution of PRS. We don’t want to hold any more
than that because that itself is a huge responsibility.
UT : Are there salient differences between
PRS funds and UT funds?
AZ : For one, a unit trust is an instrument that you buy
and sell as and when you please. It is supposedly
a long-term investment but sometimes when you
see market going down, you might want to sell. The
difference is, with PRS, you don’t have that option.
That is to say you are fully invested at any given time.
And time is a friend for PRS.
For example, a very long-term research on the
private pension scheme in North America showed
that returns there were equal to those in Chile. This is
to say over the last 20-odd years or so, returns from
both these industries that are geographically diverse
has returned more than 10%. Why have the returns
been uniformly high? Because they were both fully
invested at any given time.
UT : What do you think is the biggest
obstacle preventing greater take-up of
the PRS presently? You mentioned an
over-reliance on EPF earlier.
AZ : The mind-set of the investing public is one
obstacle. There are other obstacles from the demand
side, i.e. our investing public. Right now there are
certain tax-breaks that are given for individuals
and employers, and while I think it’s enough,
something else we have to look at going forward is
to provide some capital guarantees for a portion of
the contributions. The PIDM (Perbadanan Insurans
focus on industry
Deposit Malaysia) does something similar with bank
deposits.
Chile has taken this step but it took them almost
20 years for them to do it as they had to gauge the
stability of the industry.
UT : Do you expect PRS to evolve beyond
the current model now and how?
AZ : The PRS as it stands now is unit trust-based.
The next move will probably be and I’m not guessing
when it might come deferred annuities, which means
to say contributors will receive a pension every
month. But this is why we need the Private Pension
Administrator (PPA), which will manage and control
all contributions to private pension whether it’s from
unit trust or deferred annuities later on.
UT : What kind of plans,
education
programmes or support for its membership?
AZ : First, we will assist in all promotions-road shows,
educational conferences-we will provide the people
and necessary support. Two, we are looking forward
to also providing, still in the offing-preparatory
courses for PRS exams so when people come to
the exams they don’t come completely unprepared.
We will provide all the available opportunities via
the web for them to accumulate CPD (Continuous
Professional Development) points to make it easier
for them to requalify.
Do you have a burning question for UT Today on
anything to do with the unit trust industry or the PRS?
Feel free to drop us a line at uttoday@fimm.com.my
and we may respond to your query in the very next
issue.
13
focus on industry
UT today volume 10.2 2012
Private Retirement Scheme :
What’s in it for me?
Written By
Carol Yip
Malaysians now have greater opportunities to save more for their retirement.
The Government has formulated a Private Retirement Scheme (PRS) blueprint
and full implementation will soon begin.
What does the future hold for Malaysians and their savings? While the
Employee Provident Funds (EPF) is here to stay, Malaysians will now be
encouraged to save even more in the new pension-like retirement benefits
scheme. These are good steps fowards.
Current Retirement
System
Malaysia’s
current
retirement
system is based on a mandatory
pillar for employees, anchored
on formal public pensions. The
system, however, faces a number
of challenges. More than two million
working adults, including the selfemployed, are not covered under
EPF, according to the Government.
Furthermore, the majority of EPF
contributors exhaust their savings
within three to five years of retirement.
At the same time, the ageing
population is becoming a larger
part of the entire population.
Consequently,
the
need
for
individuals to save more for
retirement has intensified. In
recognition of this, a Government
joint-agency task force comprising
the Ministry of Finance, Bank Negara
Malaysia, Securities Commission
and the Economic Planning Unit
has been established to review the
country’s pension system.
14 The Government of Malaysia now
envisions a vibrant private pension
industry. By 2020, the Government
expects the private pension industry
to grow to RM73 billion, with more
than 2.7 million participants.
And are we interested in saving in the Private Retirement Funds?
We interviewed three Malaysians
to see how they might like to
see Private Retirement Funds
implemented.
What Malaysians’ have to
Inclusive of retirees
say
Alan, a 60 year-old retired widower
But what is most important is how
much do we Malaysians know
about Private Retirement Funds?
said he will participate in the Private
Retirement Scheme even though
he is retired. He felt a mandatory
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UT today volume 10.2 2012
savings programme would help
him. He wanted the PRS savings for
his old age living and long term care
because he is not presently able to
buy insurance due to pre-existing
health conditions and his age.
The Private Retirement Scheme
should be made compulsory if the
employee has no other savings
option, he added. But if the
employee is already contributing
to Employee Provident Fund,
(EPF), then the scheme can be
voluntary. He stressed retirement
planning training programmes at
the workplace is important for the
success of the Private Retirement
Scheme. He went on to emphasize,
“Starting from the first day of work,
all employees should be educated
on managing their finances with
a retirement plan in mind, and
the private pension fund must be
considered pivotal to a retirement
savings plan.”
about money management and
retirement savings while they are
still studying. “Students should
be taught basic personal finance,
wealth creation and management,
and our psychological relationship
with money. More importantly, they
should be living a lifestyle that will
impact on their finances.”
According to Alan, it is not too early
to teach them about retirement
because they have parents who
will retire one day. Should old age
The father of three children wanted
young Malaysians to know more
15
focus on industry
parents have insufficient money, it is the children’s
responsibility to take care of their parents, including
paying for their living expenses.
He suggested that employer should contribute
a certain percentage of the employee’s monthly
salary into the PRS. The funds should also have an
inflation index to protect the value of money and the
administration fees should be minimal or less than
what is currently charged for unit trust funds.
What does Alan hope to see for Malaysia’s Private
Retirement Scheme to achieve the vision of
higher income level society? He said, “At least, a
significant number of Malaysians, including current
retirees and senior citizens, will have a sustainable
retirement fund and income during retirement above
the poverty level.”
Importance of education
Jenny, 28 years, who is about to get married soon,
said that PRS is a good complement to the existing
EPF because it helps her to top up her savings for
future retirement. She will definitely participate in
the scheme because of the motivation ‘to save
enough retirement funds in a less hassled way’ and
with the tax incentives given, the PRS scheme is
very attractive.
She highlighted that disabled individuals including
the deaf and blind who don’t have the means to
save their money for retirement must be given
the opportunity to participate in the scheme too.
The regulators have to think of a sustainable PRS
contribution structure for these minority groups
because they need financial support for survival
and old age.
As a busy IT programmer, Jenny preferred online
education”. I think the Internet is the best way
for me; a proper website is a must. Secondly, the
education provider and related party should have
easy to understand information and train the unit
trust consultants to educate the clients instead of
just selling the products,” she added.
She liked the idea of providing personal financial
training programmes at the workplace to teach
employees about retirement planning, ‘Knowing
more about PRS will motivate the employees to
work harder to save their salary for retirement with
PRS schemes.’
She added that educating the students in school will
inculcate good savings habits, and automatically
they will save their first salary in the PRS without
hesitation.
16
UT today volume 10.2 2012
A specific benefit that will motivate Jenny to save
in PRS is her desire to save sufficient funds to
cover the cost of a nursing home in her old age. The PRS fund manager’s credibility and the option
of additional PRS contribution from employers are
also positive encouragement to participate in the
scheme for Jenny.
Independent regulatory set up
Mr. Lim, in his late 40s, who has recently resigned
from his full time employment and started his own
consulting business, was of the opinion that the
PRS scheme should fulfill the objective of saving
more than enough for retirement. He would like to
have more than enough to pass on to his family.
He emphasized the importance of the fund
managers’ credentials, experience and knowledge,
and reputation of the company managing the funds.
It is also important to have a regulatory body as a
watch dog to ensure the PRS providers are doing
their job ethically.
He said, “There has to be integrity and sense of
responsibility to protect people’s hard earned
money and life savings. Otherwise, there is no
difference between these proposed funds and
financial scams. If fund managers fail, Malaysians
will lose confidence and will not voluntarily save
their money with the providers. It is as good as not
introducing the scheme at all.”
Whilst Mr. Lim felt strongly that the Government
and regulators have to take responsibilities, he also
believed that individuals including employers have
their important roles and responsibilities. Individuals
must be keen to understand more about PRSs and
take ownership in saving money through PRS.
Concerted
effort
Retirement Scheme
for
Private
These three sets of insights and comments
about Malaysia’s PRS show a keen interest in its
implementation and a strong desire for its success. A concerted effort amongst Malaysians, regulators
and financial industry players is required to ensure
the success of the scheme. We have the advantage
that we can learn from other countries’ previous
successes and failures.
It is crucial that the Malaysian Private Retirement
scheme elevate our financial status - especially for
our silver community of retirees and senior citizens if we are to achieve the Vision 2020 of a high income
nation in 8 years’ time. And now is the time to start
educating Malaysians so we are all ready for the PRS
schemes.
focus on industry
UT today volume 10.2 2012
Time to turn
bullish on
China?
By Heather Bung
Unit trust investors who have shied away from funds with exposure
to China’s equity market may want to reconsider their position as
there are some indications that the Chinese economy may have
bottomed out.
Despite mixed opinions on the future of China’s
prospects, undervalued equities and suggestions that
the Chinese economy is finding a new sustainable
footing makes it an attractive investment destination.
Hwang Investment Management’s chief investment
officer David Ng says that fears over China’s
sustainability may have been overblown as the
country remained economically strong even if it
doesn’t reach the same heights as it used to.
“There has been too much concern with regards
to China’s slowdown,” Ng says. “No doubt China
cannot sustain its historical double digit growth rate;
however, at the rate of 7.5% a year, we believe it is
reasonable and sustainable.”
(For more of David Ng’s views on the global economy,
please see his article entitled Unit Trust investors and
the global economy in this issue of UT Today).
The mini-panic in China was sparked by a slew of
negative data including GDP, factory output and loan
data started pouring out of the People’s Republic. This
prompted a number of prominent investment banks,
including Japan’s Nomura, to issue cautionary reports
predicting a very real possibility of a hard crash.
17
focus on industry
A year ago, Nomura told its clients that China had
a “one-in-three chance” of crashing and burning,
but has nonetheless reversed its position since then
with China having ostensibly avoided the worst case
scenario.
Indeed, new reports are now suggesting that Chinese
equities are undervalued, and deserving of another
look even in the midst of controversies surrounding
some dealings including the steel commodity.
A recent Forbes article by Frank Holmes suggests
that at the beginning of October, Chinese stocks
were “trading at hefty discounts to world averages
and even to euro zone stocks,” citing independent
research firm BCA’s findings.
BCA in its report indicated that Chinese shares had
a forward price-to-earnings ratio – an important
benchmark of a company’s performance denoting
how much investors pay for every dollar of profit
made by the company – of below nine times; the
world and U.S. benchmarks traded at 12 and 13
times, respectively.
“Chinese stocks are also cheap compared to
emerging markets. In 2007, China traded at a 75%
premium to emerging markets. Today, Chinese stocks
trade at a 20% discount,” Homes says.
“If you look at a comparison of price-to-earnings in
China to those in emerging markets, you have to go
back to 2006 to find that ratio as low as it is today.”
Meanwhile, Bank Islam’s chief economist Azrul Azwar
says that while a slowdown is inevitable, it would be
“highly unlikely” for China’s GDP to fall below 7% this
year.
“Definitely a slowdown is on the cards,” he says.
“We have seen many indicators that point towards
that this year. A soft landing in China, of GDP growth
below 8%, will have an impact on the region. But
the Chinese authorities have made some moves [to
soften the blow] already, and perhaps more will be
coming.”
The last 10 months has seen China putting on the
brakes after having been in overdrive for the better
part of a decade, and this has soured the country’s
growth story.
China’s real gross domestic product (GDP) grew at a
slower pace of 7.4% year-on-year in the third quarter,
which marked its lowest posted number since the
first quarter of 2009 and its seventh consecutive
quarter of deceleration. The growing volatility in China had caused a number
of unit trust providers to grow lukewarm on the
country’s prospects earlier this year and subsequently
reduce their exposure to the equities market there.
18 UT today volume 10.2 2012
But with green shoots already emerging at the macro
level, this may quickly change.
Economists generally agree growth will likely
gradually build momentum in the 4Q and strengthen
further in 2013 as earlier monetary easing measures
filter down to the economy. This will likely be aided
by the government’s efforts to roll out infrastructure
spending to boost economic activities and as exports
gradually recover.
Investors who question fundamentals of Chinese
stock may be comforted with the recent encouraging
development on the macro level. Economists are
expecting China’s Gross Domestic Product (GDP)
growth to be healthy at around 7.5% to 7.8%
and 7.9% to as high as 8.6% for 2012 and 2013,
respectively.
Plus, there is already excitement around China’s
once-a-decade leadership change slated for early
November spreading beyond diplomatic circles into
corporate boardrooms. Many foreign firms believe
Beijing will ramp up state spending and lift demand
when its new government takes office.
The evidence here seems to indicate that the Chinese
market, and funds exposed to it, may be at or near the
bottom range of its valuation. With strong evidence
suggesting that the market will only strengthen, it
may be a good time for investors to relook at their
China exposure.
Disclaimer: The article is not to be construed as
an invitation or solicitation for the subscription,
purchase or sale of any fund. An investment
involves risks. Past performance and any
forecast are not necessarily indicative of
the future or likely performance of the fund.
Investors should read the Fund’s prospectus
and if necessary, consult financial or other
professional advisers.
focus on Products
UT today volume 10.2 2012
Unit Trust
iNVESTOR
investors and
the global economy
By David Ng, Chief Investment Officer,
Hwang Investment Management
There are two opposing forces that are influencing
financial markets now. On one hand, the weak
global economic growth environment continues to
weigh on the markets, while ample liquidity in the
system pumped in by the central banks to keep
the economy afloat is supporting it. That explains
the spurts of the rallies and the see-saw market
performance that we are experiencing now. The
market needs to see leading economic indicators
turning up before making the call that the economic
slowdown has bottomed out.
Best Defense is a Good Offense
Given the weak mixed sentiment on the external
front and the more positive outlook locally, this
is when we ask ourselves, “Where do we find
opportunities to participate in the upswing without
taking excessive risks?”
The answer lies in high quality dividend stocks
and bonds, as these are companies that can roll
in the dough in the current economic climate due
to its strong business fundamentals. Our belief in
investing into quality names underlies a simple
Machiavellian tactic, “the best defence is a good
offense.” This approach allows us to position our
portfolios strategically to participate in the rally
whilst being confident in the quality of our portfolio’s
assets which will act as a guard against excessive
risks.
Equally important is keeping a comfortable cash
level and active asset allocation tactics so we can
seize attractive opportunities when it comes and exit
the market should adverse circumstances occur.
For investors who can stomach some equity risk and
are thinking of participating in the market, it would
be prudent to invest in equity funds that invest in
high quality assets as they are more defensive in
nature. For investors who prefer safer investments
and do not fancy the uncertainty of investing in
equity markets, fixed income funds and a hybrid of
bond and equity funds are ideal.
Malaysia & General Election
Despite the economic headlines painting a horrible
picture throughout the year, equities have done well.
This is happening precisely because of the weak
global economic environment. Central banks around
the world are keeping interest rates low and adding
liquidity into the system. As such, investors and
savers around the world are desperately searching
for superior yields, which are usually in the form of
high yield stocks and bonds hence pushing up their
prices and creating this low risk bull run.
19
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UT today volume 10.2 2012
We think this trend will continue towards
early 2013 as the liquidity condition is not
abating. Investors are getting more and more
comfortable with high yield positions and are
increasingly piling into it.
Malaysia’s General Election may pose a
serious risk to the market but according to surveys done, we
know that at least 70% of investors have already identified this
as a key risk. More importantly, they have already underweight
Malaysian equities in preparation. This basically tells us that if
the government calls for an election, it will be so well anticipated
that the actual event will have a much smaller impact on the
market than what most fear. Markets tend to react more
adversely to new risks or news, not well anticipated events.
As for the global economy in general, the data coming in are still relatively mixed. China and Europe are still weak, but
US growth is resilient. To get a sense which direction the economy will head in 2013 and how investors can position
their portfolios, let us have a look at where the three main economies of the world, Europe, US and China, could most
likely head towards:
Europe
The announcement by the European Central Bank (ECB) to purchase its member states’ sovereign bonds via the
Outright Monetary Transaction (OMT) was well received by the markets. This essentially means that ECB will be the
lender of last resort and this is a positive move as it substantially reduces the tail risk of a Euro debt crisis implosion.
It gives some form of confidence to the market and the policymakers some breathing space so its leaders can
concentrate their energy on addressing structural problems in the Eurozone such as bringing back its economic
growth, creating employment, cleaning up its balance sheet and keeping the Eurozone integrated.
US
To add icing to the cake, the US Federal Reserve announced the much anticipated Quantitative Easing (QE3) a few
weeks after the announcement of OMT. This was timely as Operation Twist expired in June 30 this year and the
headline economic numbers were turning lethargic. Market participants were also concerned about the sustainability
of US economic growth when plans implemented following the 2008 subprime crisis expires in the first part of 2013,
an economic event popularly known as “Fiscal Cliff.”
Despite all these fears, the US market is different from EU in the sense that they can print money and solve their
problems over the short-term. We expect that the US will most likely increase its debt ceiling and this will not impact
US Treasure yields in the short-term regardless of its rating, as investors will still buy its Treasuries due to its perceived
safe-haven status. China
There has been too much concern with regards to China’s slowdown. No doubt China cannot sustain its historical
double digit growth rate; however, at the rate of 7.5% a year, we believe it is reasonable and sustainable. China has
kept its economy from overheating, but warm enough to keep employment in check. The China government has
enough reserves in their coffers to ensure that their economy will not be too cool as that will lead to unemployment.
The government will not risk a spike in the unemployment and they will do what they can to keep it in check as
changes by even 1 percentage point will be too much to handle. Besides, with the new leadership transition
coming in by November 2012, there will be policies implemented to ensure they start the administration
with the right footing.
20 focus on Products
UT today volume 10.2 2012
Get The Low Down
on Ringgit Cost Averaging (RCA)
Written By
Linnet Lee
Perspective in Investment
The word ‘investing’ has been used in a broad sense when it comes to assets such as unit trust, shares, bonds, businesses and
properties. It has been defined by the various dictionaries as “to commit (money or capital) in order to gain a financial return.”
The idea of investing is to accumulate assets whenever the market conditions are right so as to make a gain over a longer time
horizon, usually for a specific goal. When the investment has reached target gains, the person may sell the investment to utilise
the money gained or he may keep the investment to enjoy the income from it, depending on the investment goal.
Reference is made to the article entitled Protect the Downside and the Upside Will Take Care of Itself written by Grace Chan
in UT Today, Vol 9, 2011. This article expands on the difference between regular and lump-sum investing, and will give you a
deeper understanding of ringgit-cost-averaging through regular savings.
There are many strategies for accumulation, one of which is ringgit-cost-averaging method, the main focus of this article.
Ringgit-Cost Averaging Concept
It is important to be clear about the difference between
ringgit cost-averaging with simple averaging. The two following
scenarios will illustrate the difference.
Scenario One: Simple Averaging
An investor purchases 1,000 units of Fund A at RM1 per unit the
first time and another 1,000 units of Fund A at another time for
RM1.05 each. That would make the total investment RM2,050 and
the average unit price RM1.125.
The average cost per unit will not trend towards the current market
value this way. Furthermore, it is not practical in unit trust investment
which is forward pricing, as you will need to know the price in
advance to determine how much to invest.
Date
Price (RM) Units
Amount Invested
Dec-97
1.00
1,000
1,000
Mar-98
1.10
1,000
1,100
Jun-98
0.95
1,000
950
Sep-98
0.90
1,000
900
Dec-98
1.00
1,000
1,000
Total
4.95
5,000
4,950
Average unit price = 4,950/5,000 = RM0.99
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UT today volume 10.2 2012
Duration
Contribution (RM) Rising Market
P (RM)
Unit Declining Market Volatile Market
P (RM)
Unit P (RM)
Unit
Dec-97 1500 1.00 1500.00 1.00 1500.00 1.00 1500.00
Mar-98 1500
1.05 1428.57 0.95 1578.94 1.10 1363.64
Jun-98 1500
1.10 1363.64 0.90 1666.67 0.95 1578.95
Sep-98 1500 1.15
1304.35 0.85 1764.71
0.90 1666.67
Dec-98 1500 1.20
1250.00 0.80 1875.00 1.00 1500.00
Total
7,500
5.50 6846.56
4.50 8385.32 4.95 7609.26
7,500/8385.32 = RM0.89
7,500/7609.26 = RM0.98
Average Unit Cost : Average Unit Price :
7,500/6846.56 = RM1.09
5.50/5 = RM1.10
4.50/5 = RM0.90
4.95/5 = RM0.99
Scenario 2: Ringgit-cost averaging
Using ringgit cost averaging, an investor would invest a fixed amount as shown in the table above. Thus, when
investing in the same fund at various intervals, the investor will end up with 7,609.26 units invested at a total cost
of RM7,500.
This brings the average cost to RM0.98/unit and reflecting the current market value better than the simple averaging strategy.
Case Studies in Ringgit-Cost Averaging
To fully understand the principle of Ringgit-Cost Averaging, five scenarios are shown in the table below. The different
scenarios are based on actual investments made. In each scenario, the following are constant for comparison purposes :
• Type of fund, which is an index fund
• Duration of investment
• Total original investment
Variables are :
• Actual redemption prices
• Returns upon redemption based on strategies applied
• Returns upon redemption based on date redeemed
It gives readers a sense of what to expect when they apply different strategies in unit trust investment, especially within
the same fund. The outcome is different for different durations and situations.
COMPARSION OF INVESTMENT STRATEGIES & RETURNS FOR AN INDEX FUND
NoInvestment StrategyReturn on Return after 11 years 15.4.2004 @ NAV on 14.3.2012 (%)
0.5037/unit (%)
Total
AnnualisedTotal
Annualised
1
Monthly autodebit June
2000-December 2003
(3.5 years) Initial
amount RM1,100 with
RM450/month
18.56%
4.54%
157.68%
8.39%
2
One time investment at launch
0.74%
0.19%
118.95%
6.90%
3
Invest at launch with value cost averaging:
20.11%
4.90%
161.06%
8.51%
Date
23/10/00
05/04/01
24/10/01
Price (RM) 0.4634
0.3665
0.3771
Amount (RM)
5,000
5,000
5.000
4
Lowest price invested on 5.4.2001
@ RM0.3665/unit
37.50%
11.20%
198.72%
10.54%
5
Invested in 2002 @ low cost RM0.4529/unit
with ringgit cost
averaging at lower
price on 7.11.2002
@ 0.4073
17.44%
8.37%
155.26%
9.91%
22 focus on Products
UT today volume 10.2 2012
Scenario description
This is a classic case of a fund launched at RM0.50/unit
and the price dropped and stayed down for the next few
years only to recover in 2004. The price of the fund on
15.4.2004 was RM0.5037/unit.
For ease of return comparison, I have adjusted the amount
invested to reflect a total of RM20,000 for each strategy
with the same redemption dates.
In Strategy 1, investors did invested regularly until the
price of the fund recovered to be almost on par with its
launch price, then redeemed.
Strategy 2, investors invested a lump sum during launch
and did nothing after that. They naturally panicked as the
price dropped further and swore that the fund was a lousy
one. They did not make money for 4 years.
Strategy 3, is another group of investors who also invested
during launch and went on to ringgit cost average down
when the price dropped (shown in table 2). Perhaps they
have a higher risk appetite and the fund matched their
ability to take risk?
Strategy 4, is a very small but fortunate group of investors
who invested at the lowest price and kept the investment
until it recovered to its launch price. This group of investors
is very rare as by then most investors will have shied away
from the market following the previous year’s market
downtrend.
Strategy 5, group are late-comers to the investment
scene. They are not emotionally affected as they did not
invest when the price is high. Instead, they see opportunity
as the price had dropped from the original launch price
and is on the way up. When the price dipped a little bit
more, they felt optimistic enough to lower down their cost
by putting in some more investments.
Basic Principles of Ringgit
Cost Averaging in Unit Trust
Investment
For Strategy 1, it is evidenced that the regular savings
with long term horizon gives very favourable returns. If the
investor is able to take advantage and put in more than
the RM450 when the unit price is really low, the returns will
definitely be higher.
In Strategy 2, the investor must ringgit-cost average down
his or her price of investment as evidenced in Strategy
3. Averaging down the cost helps lower the average unit
price so that when the price of the fund increases with the
index, the investor will realise gains quicker.
In Strategy 4 above, if the fund is invested at the lowest
possible price, it is best not to average-up the unit price by
investing at higher price. This strategy requires constant
monitoring. If the price falls below the purchase price, the
investor can then do ringgit-cost averaging.
For Strategy 5, you can either hold, or if the opportunity
arises to ringgit-cost average down, you can take advantage.
Always remember: your buying price must be lower than
your average cost per unit
To the perennial question that many investors and
consultants ask, is it really true that if an investment is kept
long enough there will be returns?
My answer to that is a resounding ‘yes’, barring any drastic
unforeseen events (called outliers in investment terms) such
as Black Monday or the collapse of the country’s economy,
and if the right strategies are put in place.
This can be seen from the last 2 columns of Table 2. The
investments are tracked till 14th March 2012. The total and
annualised return has grown with the market. By now you
would have realised that the annualised return is even better
than fixed deposit and EPF. Need I say more?
This is more so because this is an index fund and hence
mimics the performance of the share market. For other
asset class funds (equity, bonds, balanced), the outcome
will be different; but that is a topic for another time.
Ringgit Cost Averaging is a simple and effective investing
strategy, especially for those who don’t want to monitor
the market all the time. It is a flexible strategy that can
be tailored for specific financial goals such as a home
purchase, children’s education or to enhance existing
retirement funds.
Linnet Lee, CFP, IFP, is a Financial Workshop Facilitator of Linvest Services.
23
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UT today volume 10.2 2012
Islamic investing and SRI: Unlocking
the potential of intersecting values
By Aziza Masri
With the global economy experiencing slower growth
following the 2008 recession and financial crisis,
investors, too become more cautious on where to park
their funds in order to achieve safe and stable returns.
This has, in turn, given rise to the growth of alternative
investments, where investors seek returns from
instruments other than the three traditional asset
classes of stocks, bonds and cash.
This investment platform has also been expanded to
include Shariah compliant instruments, which have
been proven to be a comparable alternative in the face
of the current investing environment.
In September 2012, data from S&P Dow Jones Indices
showed the Dow Jones Islamic Market Titans 100
Index, which measures the performance of 100 of the
world’s leading Shariah compliant stocks, rose 2.76%,
only marginally trailing the performance of the Dow
Jones Global Titans 50 Index, which gained 2.95%
during the month.
In Malaysia, Shariah compliant securities listed on
Bursa Malaysia recorded a market capitalisation
of RM883.8 billion as at the end of September
2012, making up more than 60% of the exchange’s
total market capitalision. Additionally, the market
24 capitalisation of Shariah compliant equities have risen
6.6% to RM806 billion from 2010 to 2011, according
to data from Securities Commission Malaysia (SC).
Despite the proven gains in Islamic investing, the
market here remains at a nascent stage. For the period
up to September 2012, SC data shows Islamic-based
unit trusts that have been launched only amounted to
168, compared to 421 conventional funds launched.
Units in circulation of Islamic funds accounted for
67.43 billion out of the total units in circulation, while
the net asset value of Islamic funds also lagged its
conventional counterparts, at RM33.66 billion and
RM257.36 billion, respectively.
This however, creates ample room for future,
sustainable growth. “Under the Second Capital Market
Masterplan, the Islamic capital market in Malaysia
is projected to growth further at an average rate of
10.6% per annum over the ten-year period to 2020, to
take its value to almost RM3 trillion by the end of year
2020,” said Datuk Dr Nik Ramlah Mahmood, deputy
chief executive of the SC.
It is also notable that while Islamic investing, and
Shariah compliant finance as a whole, is a faith-based
platform, its offerings are open to members of all faiths.
UT today volume 10.2 2012
focus on Products
The similarities between Islamic investing
and SRI are many. For example, both adopt
stringent risk management practices. Another
similarity is the emphasis on charity and
focusing on societal values. Islamic investing
and SRI both also exclude investments in
unethical business, products and services.
One useful approach to marketing Islamic products is by
taking advantage of its alignment to socially responsible
investing (SRI), yet another growing area in the investment
environment; focusing not just on profit-making strategies
but also taking into account environmental, societal and
governance (ESG) concerns when making investment
decisions.
Although still another emerging area in the investment space,
estimates by the US Forum for Sustainable and Responsible
Investment noted that SRI funds already accounted for
US$3.07 trillion of investments in the US in 2010.
While still below the radar and easily overlooked, SRI has
gradually captured the attention of the Malaysian market,
as companies’ corporate social responsibility (CSR)
initiatives have gathered pace.
Additionally, in 2010, Bursa Malaysia launched its Business
Sustainability Programme, promoting sustainable practices
and aimed at creating high quality listed companies to
specifically attract SRI funds; with the launch of an ESG
Index planned to follow.
The similarities between Islamic investing and SRI are
many. For example, both adopt stringent risk management
practices. Another similarity is the emphasis on charity and
focusing on societal values. Islamic investing and SRI both
also exclude investments in unethical business, products
and services.
However, industry players note the crossover potential
between Islamic investing and SRI has yet to be fully
explored. This is as although both strategies share
similar objectives, they do not share the same knowhow. Nonetheless, experts suggest the two can be
complementary of each other; not only allowing fund
managers to access more investors, but also offer a wider
range of products. With Islamic finance poised to grow even further in the
Malaysian market, backed by continued support from the
government and authorities, Shariah compliant investing,
has, in turn, increasingly emerged as a philosophy for fund
managers to promote.
Furthermore, its parallels to SRI have created a promising
but as yet untapped opportunity for fund managers to
explore. As investors seek more portfolio diversification in
the face of the current environment of heightened risk, it
may just be a matter of time before these complementary
offerings leverage each other’s strengths and unlock
positive prospects for savvy investors.
Disclaimer: The article is not to be construed as
an invitation or solicitation for the subscription,
purchase or sale of any fund. An investment
involves risks. Past performance and any forecast
are not necessarily indicative of the future or likely
performance of the fund. Investors should read
the Fund’s prospectus and if necessary, consult
financial or other professional advisers.
Thus, the intersecting values of the two investment
strategies allow fund managers to appeal to both the
Islamic and socially responsible investor and access a
wider pool of funds.
25
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