In an exclusive interview, Federation of Investment Managers Malaysia (FIMM) CEO, Kaleon Leong, shares insights on how the tax exemptions will benefit unit trust investors and strengthen Malaysia’s investment landscape.
The recent decision by the Ministry of Finance to grant exemptions from Capital Gains Tax (CGT) and Foreign-Sourced Income (FSI) Tax for the unit trust industry has been welcomed as a boost for Malaysia’s investment landscape. In this exclusive interview, Kaleon Leong, CEO of Federation of Investment Managers Malaysia (FIMM), provides insightful commentary on how these tax exemptions will benefit over 13 million-unit trust investors, especially those approaching retirement age.
He explains the pivotal role unit trusts have played in democratising investing since the 1990s, fostering inclusivity and accessibility across income segments. Leong also shares his perspective on how the exemptions will positively influence short- and long-term capital market trends, support economic recovery post-pandemic and enable savvy investors to optimise their retirement nest eggs. Overall, this decision cements unit trust as a reputable investment vehicle, providing Malaysian investors with an affordable path to grow their wealth tax-free.
Kaleon Leong, CEO of Federation of Investment Managers Malaysia
SmartInvestor (SI): How do you foresee the recent decision to grant exemptions from Capital Gains Tax (CGT) and Foreign-Sourced Income (FSI) Tax impacting the overall investment landscape, particularly within the unit trust industry?
Kaleon Leong (KL): Firstly, on behalf of the unit trust industry, we are very grateful to the Ministry of Finance (MOF) for granting exemptions on Capital Gains Tax (CGT) and Foreign-Sourced Income (FSI) Tax. As full details on these exemptions are still pending (at the time of this interview), my comments here are fueled by optimism that the impending legislation will give the unit trust industry the necessary impetus to generate higher yields for its unitholders.
To put things into perspective, the unit trust industry has been a significant component and contributor to the Malaysian capital market since the 1990s, with a present industry Net Asset Value (NAV) of more than RM500 billion[1].
The unit trust industry have been directly contributing to the liquidity of the capital markets and adding diversity to the sources of funds with investments in equities, bonds, sukuks and fixed-income markets, which channels additional capital for investment into Malaysia’s various economic sectors.
The imposition of CGT and FSI Tax would have had a sizeable impact not only on the unit trust industry but also on the wider Malaysian capital market as it was foreseeable that a large portion of investors would have exited the unit trust industry given the impact on their returns from the application of CGT and FSI Tax in an already challenging global economic environment coupled with inflation. If the CGT and FSI tax prevailed, huge redemption pressures will force fund managers to liquidate unit trust funds’ assets in the shortest time possible, causing the capital market to be more volatile than usual.
Additionally, there would have been a lower take-up rate by fund managers for new bonds, sukuks, debentures and any other unlisted instruments. This will impact the financing needs of companies, (including government-linked companies (GLCs)).
At an individual investor level, where CGT and FSI taxes had been imposed on the unit trust industry, it would have adversely impacted more than 500 funds and 13 million unitholders, of which over 90% are individuals.
SI: Considering the decision is expected to have a positive impact on over 13 million-unit trust investors, especially pensioners and those approaching retirement age, how might the newly granted tax exemptions influence their investment behaviour and decision-making?
KL: The announcement is timely and helpful to this group of investors as they seek to replenish their retirement savings, especially after the pandemic. Hence, this should further increase investor confidence.
To provide some context on the size of this investor group, based on the FIMM 2022 Investment Management Survey, it was found that in 2021, a total of 47% (8.3 million) of Unit Trust investors are either in the pre-retirement phase, i.e., 46 to 55 years old (3.0 million), or are in the retired phase, i.e., 56 years old and above (5.3 million)[2].
SI: In your opinion, how have unit trust funds contributed to the capital market since the 90s, and what role have they played in fostering inclusivity and accessibility for investors across diverse income segments?
KL: The 90’s were a significant period of growth for the unit trust industry. The centralisation of industry regulation, with the establishment of the Securities Commission on 1 March 1993, coupled with the implementation of the Securities Commission (Unit Trust Scheme) Regulations in 1996, resulted in even greater awareness of the unit trust industry and contributed to its tremendous growth during the period[3].
Today, the unit trust industry has grown by leaps and bounds, from a NAV of RM28 billion in the 90s to exceeding RM500 billion[4]
A key role of the unit trust industry is fostering inclusivity and accessibility for investors across diverse income segments. Unit trusts enable people of all walks of life to invest in a variety of unit trust funds, with some having a low minimum entry investment amount and subsequent investments.
This relatively low barrier to entry opens the possibility for a diverse range of potential investors to participate in the capital market while simultaneously gaining from the additional benefits of having an investment professional manage their portfolio, accompanied by better diversification and risk management.
SI: How do you anticipate the capital market to react to this news, both in terms of short-term market dynamics and potential long-term trends?
KL: While the details of the exemptions granted are yet to be announced (at the time of this interview), we anticipate optimism about unit trust funds as a reputable and highly regulated investment product by the Securities Commission Malaysia (SC).
In short-term market dynamics, the resolution of these tax concerns and the accompanying operational challenges will allow fund management companies to focus on delivering their core responsibilities of generating returns for unitholders.
We envisage that in the longer-term trends, investors will continue to set aside their savings to invest in unit trust as an investment vehicle where they will not only reap the benefits of long-term investment returns but also a peace of mind.
SI: Given that the tax exemptions also apply to those investing through their Employees Provident Fund (EPF) savings, how might this influence the investment strategies of individuals who utilise their EPF funds for unit trust investments?
KL: The unit trust industry is very cognisant of investors who choose to contribute part of their EPF savings towards investing in unit trusts. The investors are entrusting the industry with a portion of their retirement nest egg, which underscores the need for careful attention on the part of the industry. As a result, the funds that are green-lit for investments via EPF savings must have a 3-year track record and undergo a rigorous selection and approval process.
As it stands, investors investing through their EPF savings may decide to further diversify their portfolio into other asset classes through unit trusts to maximise their returns and grow their retirement nest egg.
SI: Post-pandemic, individuals are diligently replenishing their depleted savings. How do you see the investment industry contributing to the broader economic recovery efforts?
KL: These may be challenging times, but this is where the unit trust industry can help Malaysians replenish their savings. Through unit trust funds, Malaysians have the opportunity to invest a part of their savings into a portfolio of pooled investments managed by investment professionals. Should they decide to invest directly themselves, they may not have the same access to investment opportunities and diversification that a unit trust offers. This also includes economies of scale from the pooled investments in a unit trust which reduces the cost of investing as a whole.
In 2021, the Securities Commission launched the Capital Market Masterplan 3, or CMP3. Within the CMP3, it was addressed that, in the post- pandemic era, there would be a period of recovery in economic growth. It was emphasised that two critical parts of Malaysia’s economic growth moving forward, which the capital market can enable, are the structural upgrade of the economy and the redefining of the retirement savings landscape[5].
Both parts can indeed be contributed by the unit trust industry as it plays a role in channelling investors savings to the sectors of the economy that need support. For the retirement landscape, the unit trust industry serves as a move towards channelling retirement savings towards potentially higher-yielding portfolios, resulting in greater savings for retirement.
SI: With the newly granted tax exemptions, what advice would you give to individual investors, especially those approaching retirement age, in terms of optimising their unit trust investments for tax-free returns?
KL: The tax exemptions were granted in recognition of the importance of the unit trust industry towards both the Malaysian capital market and providing an avenue for individual investors to save and invest their hard-earned money. As a matter of fact, it was the realisation that most investors in Unit Trust are individuals (over 90%), which proved critical in the MOF’s decision to grant the tax exemptions.
It is important to diversify your investments. Deposits help, but inflation erodes savings. Unit trusts are established with the goal of helping individual investors preserve their savings by providing a hedge against inflation.
For individuals approaching retirement age, it is important to take stock of their financial situation and consider more income-generating investments.
Sources
- Securities Commission Malaysia: Summary of Statistics – Unit Trust Funds for 2023.
- FIMM Investment Management Survey. Date: November 2022.
- FIMM Website: History of Unit Trust Schemes and Private Retirement Schemes in Malaysia (UTS History – FIMM).
- Securities Commission Malaysia: Summary of Statistics – Unit Trust Funds for 2023.
- Securities Commission Malaysia: Capital Market Masterplan 3. Date: 21 September 2021.
