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Targeting the emerging affluent market

The turbulent investing landscape and higher operating costs have been a challenge for the smaller fund management companies in recent years. But this has also resulted in more innovative products, tailored approaches, greater transparency and better access to information — a boon for the emerging affluent, mass affluent and high-net-worth groups.

Areca Capital Sdn Bhd, for instance, introduced the Areca Situational Income Fund in March. It is the first local fund to invest in a single unrated bond.

Libra Invest Bhd, meanwhile, rebranded its personalised investment products and services in May last year. And boutique firm Malayan Traders Capital offers investors access to a hedge fund that uses a lower-risk value investing strategy.

In the last few years, there have been more innovative and tailor-made products targeting the emerging affluent investor. This group is expected to grow in tandem with the rising number of entrepreneurs and professionals in the country as the economy continues to progress, says Areca Capital CEO Danny Wong. “These people, who are busy with their jobs, have money to invest and would need the advice of asset management professionals and financial advisers,” he adds.

The innovative products are also due to the current low-yield and low-interest-rate environment. The returns from these new products have to at least beat the country’s inflation rate or gross domestic product growth to preserve investors’ capital, says Wong.

It was with this in mind that the company launched the Areca Situational Income Fund. The wholesale fixed income fund aims to provide investors with a 10% yield over a five-year period. The minimum investment amount is RM100,000, and there is an annual management fee of 1% as well as a sales charge of up to 3%.

Wong says the fund was structured using the “disintermediation” method where, instead of taking the conventional route of approaching banks and rating agencies to issue bonds and raise funds, a company can bypass these intermediaries and issue unrated bonds through Areca Capital.

By doing so, the company lowers its costs. As a result, the investors who purchase the unrated bond via Areca’s fund can get higher yields and returns.

“It is an unconventional way of doing things. Usually, bonds have to be issued and sold by investment banks,” says Wong.

“The banks are the primary subscribers of the company’s bond and they make their margin through the replacement fee [by selling the bonds to investors on the market]. The banks also charge an advisory fee for structuring the bond. On top of that, the company has to pay the rating agencies to have its bond rated.

“However, the company could save costs in every stage if it goes directly to Areca. We could help it structure the bond with a lower price by negotiating with the banks. The company will not need to pay a replacement fee as we have our investors in place. Neither will it need to pay the rating agencies to get its bond rated. All these cost savings translate into a higher yield for our investors.”

According to Wong, the fund is currently fully invested in an unrated bond issued by a company operating a time-sharing business. The company needed cash for its business operations and expansion plans.

While there are risks investing in the bond of a single company, they are mitigated by making the company’s information directly available to investors, he says. In addition, the company has deposited about 50% of the amount it raised with Areca.

The deposited money, referred to as a sinking fund, is used by the fund manager to invest in low-risk instruments, such as fixed deposits, to generate extra returns. The money in the sinking fund can only be used to pay yields and returns to investors. Every month, the company is required to top up the sinking fund by a certain percentage. By the third year, the money in the sinking fund would cover up to 70% of the money raised by the company while the other 30% would be guaranteed by the assets the company owns.

“The amount of money the company was willing to deposit with us was one of the main reasons we decided to invest. The other was that the company is backed by two holding companies with larger paid-up capital,” says Wong.

Going forward, the fund will remain invested in a single company. “We will not be adding more companies to the fund because it will change its risk profile and potential returns. However, we look forward to launching more funds that invest in unrated bonds if there is an opportunity,” says Wong.

The emerging affluent group can also look forward to new financial instruments with different geographical exposure. For example, Areca Capital is looking to launch an exchange-traded fund (ETF) that tracks the European markets in the near future.

Wong says there is a need in the market to diversify investments across regions. “A lot of investors have been asking if they can buy European ETFs. This is mainly due to the [European Central Bank’s] quantitative easing programme and many companies there have easier access to funding.

“There are many companies with good business models in Europe. But not many people know the European market and they don’t have the expertise to take up the stocks there. So, the only way for them to invest in European equities is through ETFs. This product is aimed at meeting the market’s need.”

Tailored products and personalized services

“The client wanted to do a medical fund for his children. So, he parked an amount of money with us and we did the calculations for him. We calculated that he would need a 5% return every year to pay for the medical fees of his children. Then, we structured a portfolio where he would be able to draw 5% [of the invested amount] on a yearly basis to cover the fees,” says Lee.

“Based on the 5%, we lowered our risks and structured the product to be more income and dividend yield-driven. The risks are different from other products, which are benchmarked against indices, as it is aimed at meeting the client’s personal needs.”

Lee says smaller asset management firms such as Libra Invest are providing the emerging affluent group personalised products and services that were previously only available to high-net-worth individuals through big banks. In some cases, these firms have taken on a role similar to that of a private banker, that is, by taking over their emerging affluent and high-net-worth clients’ private banking accounts to restructure their investment portfolios.

“I have become like a private banker or financial adviser. We take over some of their private banking accounts, which were suffering losses, and restructure them as the clients say it is too painful for them to cut their losses. We hope that after two to three years, it will yield a positive result,” he says.

Lee says his firm is also enhancing its services for its emerging affluent clients to better compete with the big banks. He points out that smaller asset management firms are providing more personalised investment products and services to the emerging affluent because this group is not so well served by the banks. Also, this group is able to make their own investment decisions compared with institutional investors, which have to go through several layers of controls before coming to a decision.

“We are increasing our service level to this group of investors and we are trying to do it better than the big boys. If the bank’s [wealth management and private banking division] sees its clients once a year, maybe we will see them four times a year,” he says.

In fact, smaller asset management firms are actively courting the emerging affluent group. Lee says his firm is hiring more sales personnel to reach out to this group all across the country. “The problem for us now is how to reach out to them. They tend to be people who stay out of the limelight, such as the owners of small and medium enterprises in places like Ipoh and Taiping, who have a few million ringgit to invest,” he adds.

Higher returns and more transparent access

The personalised services offered by smaller asset management firms to the emerging affluent group can be seen in the way Malayan Traders Capital approach potential investors. Its founder and chief investment officer Devan Linus Rajadurai says he and his partners, who are the firm’s fund managers, meet investors personally instead of selling their fund through agents who may not understand the firm’s investment philosophy and fund performance.

Devan says there are some “super agents” in the market who not only sell unit trust funds but also properties and gold schemes. He is critical of this approach and strongly opposes the selling of funds and investment products through such agents.

“These so-called super agents sell all kinds of products without having much knowledge about them. Instead of explaining the investment philosophy and fund performance to investors, they sell products based on their relationship with these investors,” he says.

On the other hand, Devan and his partners prefer to meet up with potential investors personally to tell them about their fund’s performance and the factors that contributed to it. They also ensure that these investors know who they are investing with and how their money will be managed. As a result, their clients enjoy higher transparency and greater access to information.

At the end of the day, performance is key, says Devan. The only fund managed by the firm — the Absolute Return Fund, which is domiciled in the Cayman Islands — has generated a return of 44.4% (as at March 31) since its inception in July 2012. The fund carries a 1% management fee and a 20% performance fee above the high water mark of its net asset value. It does not charge a sales fee and the minimum investment amount is RM500,000. Malayan Traders Capital had more than RM100 million under management as at May 31.

Devan says smaller asset management firms usually manage a limited number of funds and their partners and fund managers put their own money in them. These owner-managed funds, he adds, tend to outperform most of the plain vanilla funds introduced by bigger asset management firms as they have “more skin in the game”.

Devan believes that wealthy investors (including the emerging affluent group) will see more alternative investment choices going forward. This is because the Securities Commission Malaysia (SC) has made progressive steps in recent years for niche fund managers to be licensed as boutique fund managers, and that these firms will offer investors more alternative investment products. For instance, Malayan Traders Capital employs leverage in the form of low-interest US or Singapore dollar-denominated loans to invest in companies to enhance returns.

In July last year, the SC relaxed its rules by allowing boutique firms with a paid-up capital of RM500,000 to be licensed. This compares with the RM2 million required for a full-fledged fund management company. Malayan Traders Capital was a beneficiary of this move.