Time to consolidate fund management industry?

PETALING JAYA (Feb 11, 2014): Five fund management companies may be handling 65% of the RM569.2 billion assets under management (AUM) in the country but there has been next to no moves to consolidate despite stiff competition in the industry.
According to the Securities Commission's (SC) latest statistics on the industry, as at Sept 30, 2013 there are 80 fund management companies.
Sources of AUM include unit trust funds, corporate bodies, Employees Provident Fund, private pension funds and charitable bodies.
Franklin Templeton Asset Management (Malaysia) Sdn Bhd country head of Malaysia Sandeep Singh (pix) told SunBiz the industry remains fragmented where the largest five fund management companies control around 65% of the total market share in Malaysia.
"That leaves a much smaller pie of assets for the remaining players. The asset management industry is already facing stiff competition, regulatory changes, talent shortage, and the need for more product innovation. These add to the cost of doing business."
He said in the initial years when benefits of scale are limited, one would require an unwavering long-term commitment from the shareholders to sustain a fund management business.
"With the growing trend of Malaysians diversifying their investments offshore, this requires investment firms to build on-ground investment capabilities and infrastructures overseas as well. As such, there is greater need for the smaller firms to reevaluate their existing business model or commitment."
With 81 fund management companies for a population of 28 million people, Malaysia does have a higher number of companies as compared to countries like South Korea and India.
South Korea with a population of 50-odd million people as at June 2013, had some 84 fund management companies while India has reportedly 44 asset management companies in the country which is populated by 1.3 billion people.
The numbers denote not so much of a relation between population and the number of fund management companies but rather the maturity of an economy and the development of its capital market.
"Over 80 fund managers for 28 million people in Malaysia is not something which is alarming. We've got fund managers managing for a few clients ....
"It's not an industry where you need scale, like banks," a chief compliance officer in a fund management house told SunBiz.
He said compared with Singapore, which has a lot more fund managers for their population, 80 fund managers for 28 million Malaysians is in fact, a small number.
"A lot of people still use banks to save money when they can use fund managers to get returns for their savings."
He added the situation could have been encouraged by the licensing requirements for fund management companies have been relaxed when previously all fund managers need to be a subsidiary of a bank.
Now, the SC allows for individuals to set up a fund management house and get a licence, as long as they meet the licensing requirements.
"In Singapore, if you have two or three people in the company and you're managing for less than a certain number of people, you don't even need a licence but in Malaysia, you still need a licence to do so.
"But it's still okay. It doesn't cause any concern or ring any alarm bells. These fund managers like being small and want to continue to be managing for high net worth clients. Bank-backed fund houses like scale, they like to be big but not all like fund managers to be big."
He said the smaller boutique fund managers mostly serve a niche clientele. They manage for a few clients and operate on a small scale; while the big fund houses are usually the ones that have a big sales team with retail funds, in which they sell unit trusts and private retirement schemes.
On whether there could be misconduct among fund management companies, especially the smaller firms, he said sometimes smaller firms do tend to be more "entrepreneurial" and test the laws, so it is up to the SC to do the relevant audits and checks.
"All fund managers are licenced, so they have certain reporting requirements to the regulator and the regulator have a duty to audit and check on them.
"But if you only have three or four clients, the AUM is less than RM5 million or RM10 million hence in terms of systemic risk, there's not a lot. It's different from the big firms where their AUM is RM50 billion or RM160 billion so there's a systemic risk involved," he said.
He added that if one or two small fund managers fail or are involved in some hanky-panky, illicit activity, the impact on the whole industry is not significant.
He also agreed that there is indeed a lot of competition in the industry.
"When you're a small boutique manager, you can't compete with the big boys in terms of their sales force to reach out to retail investors. So small firms can only go for the big fishes, or the high corporate, high net worth clientele.
"There's not many of them in Malaysia so small firms need to go out and market themselves. It's definitely tough for them," adding that he believes that there is no need for consolidation in the industry.
"If you're good, you provide good returns and you're compliant, your name comes up, people will put their money with you."
Malaysian Association of Asset Managers chairman Raymond Tang opined that if there are too many fund management companies around, the market will take care of itself.
"If they (fund houses) can survive, I agree that's not too much. If there's enough business to go around, then it should be fine," he told SunBiz.
Tang, who is also CIMB-Principal Asset Management Bhd chief investment officer for the Asean region, said everybody views the industry differently but he believes that smaller fund management companies should survive if they have enough businesses.
"No problem in the industry. If there's any issue, the SC will be on top of it. They're efficient," he said.
Sandeep in his response to SunBiz said more competition is good for the growth of the industry in the long run and it eventually benefits investors.
"Although Franklin Templeton is a relatively new entrant to the fund management industry here, we are able to leverage on our group's global resources since we started our operations in Malaysia and this has allowed us to offer global investment solutions to investors. That helped to shorten the gestation period in setting up an investment company and leapfrogged us to a level playing field with the more established local firms."