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Alternative Investments in Malaysia: Why You Should Consider Them

Alternative Investments in Malaysia: Why You Should Consider Them

Level 2 - Asset Classes - Alternative Investment

11 min read  ·  3266 views

Lim Wuan Chin, Research Analyst Intern

Reviewed By Charlie Yuan Ting Jing, CFA, CQF


Introduction

There are loads of different alternative investments in Malaysia. Some of the investments investors will know inside out, some of the investments that investors might have come across once or twice, and some of them will be brand new. Alternative investments are created to provide a solution. With the assistance of a professional investment manager, they could potentially provide a reliable income stream and diversification.

Key takeaways

  • Different alternative investments have varying characteristics, risks, and maturities. Investors need to choose the best investment based on their tolerance for risk.
  • Investors must understand their choice of investment before investing. If they fail to do so, they could lose their entire capital investment and suffer severe losses.
  • Investors should always read the prospectus and required shareholder reports before investing. They should also make sure that the investment adviser is registered before investing.

Types of Alternative Investment in Malaysia

In Malaysia, there are 7 types of alternative investments that are popular. In this article, these 7 types of investments will be divided into 5 different categories for comparison.

TypeUnit trust/Mutual FundsExchange Traded Funds (ETFs)
Features / BenefitsDiversification. It encompasses various types of securities at different risk levels.
Professional Management. The fund managers research, select the securities and monitor the performance.
Affordability. Most mutual funds set a relatively low dollar amount for initial investment and subsequent purchases.
Liquidity. Mutual fund investors can easily redeem their shares at any time, for the current net asset value (NAV) plus any redemption fees.
Diversification. Investors are able to receive diversified exposure to a basket of investment products that may include shares, bonds, futures or commodities by investing in ETFs.
Cost Effectiveness. Lower annual management fees make ETFs economical to buy and maintain in the long run.
Simplicity. Buying and selling of ETF units based on their current market price in a single transaction like stocks through online or offline stock brokers.
Transparency. Investors know exactly which stocks or underlying assets are held in the ETF by visiting the ETF’s website, provided by its manager or the ETF announcement on Bursa Website.
ExampleMain categories of mutual funds:
1. Balanced funds
2. Equity funds
3. Fixed income funds
4. Index funds
5. Money market funds
6. Shariah Funds
List of ETFs on Bursa Malaysia:
1. Commodity ETF
2. Equity ETF
3. Equity ETF (Shariah Compliant)
4. Fixed Income ETF
5. Leveraged & Inverse ETF
RiskMedium risk investmentMedium risk investment
Time HorizonNo limit to the investment durationNo limit to the investment duration
Who can invest• Sophisticated investor
• Angel investor
• Retail investor
Investors who have a medium risk appetite
Platform to invest• eUnittrust
• FSMOne
• Bursa Malaysia Stock Exchange
• International broker platform. Eg: TD Ameritrade, Saxo, and Interactive Brokers.

Sources: Bursa Malaysia and More Money Malaysia

The main difference is that ETFs are traded like a stock throughout the day on a stock exchange, ETFs have a bid-ask spread, and therefore a greater implied cost most of the time. Unit trusts trade at the fund's net asset value (or the underlying value), which is based on the market closing price that day and is more suitable for long-term investors who do not need intraday liquidity. (Endowus)

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2. Others: Equity Crowdfunding vs Peer-to-peer lending

TypeEquity Crowdfunding (ECF)Peer-to-peer lending (P2P)
Features / Benefits• Regulated by Securities Commission
• Returns are in the form of the capital gain on sale of shares
• Enjoy dividends after several years of investment when the funded company grows larger and is able to generate free cash flows to distribute to shareholders
• It is a portfolio diversification option for regular investors
• Regulated by Securities Commission
• Investors lend money for a specific period of time and receive principal amount with interest income at frequent intervals
• Diversification option for investors with small capital
RiskHigh-risk investmentHigh-risk investment
Time HorizonLong term investmentMid-term investment
Who can invest• Sophisticated investor
• Angel investor
• Sophisticated investor
• Angel investor
Platform to invest• Ata Plus
• Crowdo
• Crowdplus Asia
• FundedByMe
• Fundnel
• Eureeca
• pitchIN
• AlixCo
• B2B Finpal
• Funding Societies
• Fundaztic
• Nusa Kapital
• QuicKash

Sources: Securities Commission, Securities Commission and More Money Malaysia

ECF and P2P lending are two great options for small businesses looking to raise capital. However, these types of investments are considered high-risk, so investors need to have a strong understanding of financials before getting involved. ECF is when investors invest in a company and receive partial ownership in return. As shareholders, they're entitled to a portion of the company's profits (if any) and can sell their shares if the company goes public. Companies that use ECF are typically SMEs, which tend to be larger and more established than companies seeking P2P financing. (MyPF)

On the other hand, P2P investors are typically more interested in receiving regular interest payments on their investment, rather than owning a share of the company. P2P lending offers investors the opportunity to diversify their portfolio across many different loan opportunities with a relatively low minimum investment. However, since the borrowers are often startups or small businesses that aren’t well-established, there is a risk of the company defaulting on debt and the investors being unable to receive their investment returns, or even losing their original investment. (Whiteman)

3. Real estate: Direct vs. Indirect Real Estate Investing

TypeReal EstateReal Estate Investment Funds (REITs)
Features / Benefits• There are many different types of properties available for rent, such as condominiums, apartments, terrace houses, and bungalows.
• Different properties may generate different rental incomes.
• It's usually best to buy property in a location that has high demand from tenants.
• Properties usually appreciate in value over time, so investors can make a significant profit if they sell.
• If an investor doesn't want to rent the property anymore, they can still sell it for a significant profit.
• Indirect access to large, stable estate portfolios in a tax-efficient manner
• High corporate governance - REITs are governed by a Trust Deed as well as the stock exchange and the securities commission regulations, which define the operating procedures and ensure a high level of corporate governance
• Stable income stream - Investors enjoy good dividend as 90% of property stocks are paid to investors as dividends
• Professional management - REIT properties are managed by professionals who will add value for a higher yield, benefiting investors in the long run.
RiskMedium risk investmentMedium risk investment
Time HorizonLong term investmentNo limit to the investment duration
Who can investAll investors who want to own tangible investmentsInvestors who have low capital and low-risk appetite
Platform to invest• PropertyGuru
• iProperty
• Mudah Property
• Bursa Malaysia Stock Exchange

Sources: Bursa Malaysia and More Money Malaysia

Investing directly in real estate comes with a number of advantages, such as additional rental income and tax benefits. However, there are also some disadvantages to consider, such as the illiquid nature of the real estate and the fact that it concentrates the portfolio on one asset class. Therefore, investors often prefer to invest in real estate indirectly, through real estate investment trust, rather than directly owning property. An investment in a real estate investment trust (REIT) provides indirect exposure to the potential benefits of real estate appreciation, without the need to commit a large amount of capital to one property. This gives them flexibility if they need or want to sell, and exposure to shared risks can be managed according to their needs. The lower entry point for REITs allows investors to start with a smaller investment, spread their capital among multiple trusts or funds, and pursue the potential benefits of property investment with less risk. (Robert Cobean)

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4. Commodity: Physical Gold vs Gold Futures

TypePhysical GoldGold Futures
Features / Benefits• The worldwide demand for gold makes it an investment free of geographical tension.
• Gold has an excellent diversification effect as it negatively correlates to other financial instruments; for example, if stocks or bonds prices fall, gold’s price will typically increase.
• Banks determine the price of gold depending on its buying and selling price, local market price condition, world news, and exchange rate.
• Gold futures are a popular investment for those looking to trade on gold’s price movements without owning the physical asset.
• Gold futures can be used to “store” value, hedge against recessions and market risk, speculate on prices and profit from short-term gold fluctuations.
• Most investor-owned futures contracts result in a cash settlement, rather than gold delivery.
RiskLow-risk investmentHigh-risk investment
Time HorizonLong term investmentNo limit to the investment duration
Who can investInvestors who have a moderate cash reserve and low-risk appetiteAdvanced investors who can afford potential losses
Platform to investJewelry Shops in Malaysia such as
• Poh Kong Jewellers
• Wah Chan Gold & Jewellery
• Wah Chan Gold & Jewellery
• Joyalukkas
• Bombay Jewellery
• KVT Jewellers
• Maybank
• Public Bank
• CIMB Bank
• UOB
• HSBC Bank
• Kuwait Finance House (KFH)
• Bursa Malaysia Stock Exchange

Sources: Bursa Malaysia, Loanstreet, Forbes and More Money Malaysia

There are some key differences between investing in physical gold and gold futures. For instance, physical gold needs to be insured and safeguarded, which can add to the costs of owning it. Investors who rely solely on the appreciation of gold prices to generate a profit are missing out on other potential opportunities. On the other hand, investing in gold futures has several advantages, the most significant of which is the high level of leverage available. With relatively little money, investors can purchase gold futures contracts. If they correctly anticipate the direction gold futures will move, they can make a large profit quickly. However, if the market moves against them, they will need to post additional margin to maintain their position; otherwise, their broker will close their position and they will incur a loss. (Omar Ortiz)

Read more:

5. Collectables: Art, Antiquities & Jewellery

TypeCollectables (Art, Antiquities & Jewellery)
Features• To be a successful investor in collectables, one must have the extensive historical knowledge to track valuable items from around the world.
•Investors must also possess a passion for collecting old items, such as rare coins passed down through generations of royal families.
• Investors must have a sharp eye for art to only collect pieces that will appreciate in value over time.
Risk levelHigh-risk investment
Time HorizonLong-term investment
Who can invest?People with a taste for antique items, appreciate art and like to own expensive pieces of jewellery.
Platform to investBased on investor’s network

Sources: More Money Malaysia

How can retail investors in Malaysia access other Alternative Investment products via foreign brokers?

Malaysian retail investors used to have restricted access to international markets and investing in overseas stocks entailed high transaction fees. However, the process is becoming simpler and more affordable as more foreign brokerage firms enter the region to compete with local players by offering competitive rates and diverse products.

US brokerage company Charles Schwab, for example, opened an office in Singapore in November last year. This gave Malaysian, Singaporean and Thai investors direct access to the US market and zero trade commissions for a wide selection of exchange-traded funds (ETFs.) The previous year, Singapore-based iFast Financial Pte Ltd which operates Fundsupermart.com - launched the online platform FSMOne. This offered US and Hong Kong-listed securities to investors, including Malaysians. Other online brokerage services that Malaysians have access to include those offered by US-based firms Interactive Brokers (IB) and TD Ameritrade.

The cost of investing in foreign stocks is still a major concern for Malaysians. The entry of more foreign brokerage firms could potentially solve this problem, as many of them operate entirely online, charge lower fees, and offer access to a wider range of markets and a large variety of products. (Tan Zhai Yun)

Things to take note of before investing in alternative investment

1. Foreign brokers are not regulated by the Securities Commission Malaysia

The Securities Commission Malaysia has advised investors not to deal with any unlicensed or unauthorised platforms, as this can expose them to risks such as fraud or money laundering. For example, foreign brokers such as TD Ameritrade, eToro and Tiger Brokers are on the SC's Investor Alert List, which identifies unauthorised platforms.

Although appearing on the Investor Alert List doesn't confirm that a platform is fraudulent, it's worth noting that these platforms aren't regulated in Malaysia. They're usually regulated by international authorities or the national regulatory authority of the country they operate in. For example, TD Ameritrade Singapore is regulated by the Monetary Authority of Singapore, while its international counterpart is regulated by the Securities and Exchange Commission (SEC) in the United States. If Malaysian investors have a dispute with any of these platforms, they won't be able to resolve it through the Securities Commission in Malaysia. (Lim Jen Li)

2. Investment Objectives

The investment objectives of alternative investments can vary greatly. Some investments might aim to take advantage of a manager's expertise in a particular area, such as investing in specific commodities. Others might provide diversification by investing in commodities, foreign currencies, and other alternative investments. Before considering any alternative investment, investors should make sure it meets their investment needs. (SEC)

3. Risk associated

All investment vehicles come with some degree of risk; it is crucial to comprehend the risks associated with the investment before becoming involved. An investor's risk appetite should guide their investments, helping them make the most of their money. If they want to protect their initial investment, they should go for lower-risk options, though the returns may not be as substantial. However, if they're hoping to make a lot of money and are willing to take risks, their portfolio will look different.

4. Fund Manager

Investors should do their due diligence on the fund manager, such as how long he or she has managed the fund and what his or her prior management or professional experience is. This type of information can be found in the fund’s prospectus, which will give investors an idea of whether it is a wise investment and whether the financial goals set by the fund manager are achievable. (KFintech)

Prospect of Alternative Investments in Malaysia

The alternative investment market in Malaysia has seen impressive growth in recent years and there is potential for further development. Equity crowdfunding (ECF), peer-to-peer (P2P) lending, venture capital and other verticals have become increasingly important as investors seek higher returns than what conventional products can offer. The pandemic was the biggest challenge the industry faced, but it rebounded with innovations, new launches, rising demands and transformative initiatives. The Malaysia Co-investment Fund (MyCIF) was set up under Budget 2019 to promote co-investments in micro, small and medium enterprises (MSMEs) and social enterprises alongside private investors via ECF and P2P platforms. This will help to further promote the growth of the alternative investment market.

The bottom line

All investors must remember that it is important to research their investment options before making any decisions. Just like when they consider buying a house or car, this is a long-term commitment that requires a lot of research and is actually an investment in itself.

References

Author


speaker profile

This article is written by Lim Wuan Chin, Research Analyst Intern

Lim Wuan Chin is currently majoring in Finance and Investment at Tunku Abdul Rahman University of Management and Technology (TAR UMT). Wuan Chin joined TED Optimus Sdn Bhd for 3 months as a research analyst intern. She has participated in Bursa Malaysia Derivatives Virtual Trading Challenge 2021. She is an in-house author from TED Optimus.

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Table of Contents

  1. Introduction
  2. Key takeaways
  3. Types of Alternative Investment in Malaysia
  4. How can retail investors in Malaysia access other Alternative Investment products via foreign brokers?
  5. Things to take note of before investing in alternative investment
  6. Prospect of Alternative Investments in Malaysia
  7. The bottom line
  8. References