FIN 308
TYPE OF INVESTMENT ALTERNATIVE IN MALAYSIA LECTURER : DR. JAAFAR BIN PYEMAN
WAN NABILAH BINTI MEOR MOHD JAMIL (2009245922) 2/19/2010
CONTENT page Introduction Alternative Investment Type of Alternative Investment Risk on Alternative Investment Prospect of Alternative Investment Reference
INTRODUCTION The Malaysian regulators have generally adopted a consistent approach on the regulation of products and markets. We place substantial emphasis on transparency and disclosure as a means of achieving fair markets. Our formula is for the Malaysian markets to be like our weather - lots of sunshine. In this regard, the structures for alternative investments can be highly complex. The more complex the structure, the harder for regulators and investors alike to fully understand and control the consequences from such products. This may result in the transfer of risks without the full knowledge of the investor or a build-up in risk to financial stability without sufficient warning especially when some modern structures are utilized as a complex basis for transference of risk through an often long chain of transactions. The onus is on the industry to continue with their efforts to educate capital market stakeholders and to work closely with the regulators in constructing a facilitative framework which can find the right balance between enhancing the growth of the industry while ensuring ample safeguards to protect the interest of investors. In this regard, the development of the Guidelines on the offering of Structured Products is a case in point. These guidelines were developed by the SC based on requests from industry and were formulated after extensive consultation with industry associations, professional bodies and experts. These guidelines introduce an avenue for the issuance of tailor-made yield enhanced financial solutions to be offered to sophisticated clients.
ALTERNATIVE
INVESTMENT
An alternative investment is an investment product other than traditional investments such as stocks, bonds or cash. This broad definition makes it impossible to list all alternative strategies, but the most important areas are real estate, private equity, venture capital, commodities, and hedged or absolute returnstrategies. Wine, art and antiques, indeed any business of value, might also be considered as an alternative investment. One common theme to alternative investments is that they are often hoped to have modest correlations with traditional investments and so to increase the diversification of investor's portfolios. One advantage of alternative investments is the potential of high profit when stocks are under-performing, on the other hand, risks may be substantial.
TYPE OF
ALTERNATIVE
INVESTMENT
BONDS
The bond market in Malaysia has developed significantly in terms of market size, range of instruments and efficiency. The development of the bond market centres on the need to establish a well-diversified financial base to meet the changing needs of the Malaysian economy. Concerted measures to develop the bond market were taken by the Government, and success of these efforts are reflected in the significant growth of the bond market, marking Malaysian bond market as one of the fastest growing bond markets in Asia. Among the recent key initiatives are: The Government issued its inaugural Callable MGS 5NC3 in December 2006 and followed by MGS 10NC5 in February 2007; The Government introduced switch auction in January 2007 to improve the overall market liquidity by replacing the off-the-run MGS with the on-the-run MGS; Bank Negara Malaysia issues its first Sukuk Ijarah Notes in February 2006, as an additional tools to manage liquidity in the banking system; Bank Negara Malaysia issued the inaugural Bank Negara Monetary Notes (BNMNs) to replace the Bank Negara Bills and Bank Negara Negotiable Notes in December 2006. BNMNs can be issued on discount-to-value, fixed-rate or floating rate coupon bearing bonds. In July 2007, the first floating rate BNMNs were issued. As at end-July 2007, the size of the bond market reached RM527.3 billion, approximately 92.1% of GDP. The bond market has a balance mix of both public sector and private sector bonds each contributing 55.5% and 45.5% share of total bond outstanding respectively. Today, the corporate bond market makes up approximately a quarter of the total debt financing (including bank loans) to the economy compared with around 10% in 1997. Such rapid growth is a reflection of the expanding private sector financing needs, especially the considerable infrastructure development needs in Malaysia, which require more long-term financing, have provided a strong impetus to the market. A wide variety of debt securities products are available in the Malaysian bond market, such as fixed coupon bearing bonds, floaters, asset-backed securities, convertible bonds, callable bonds, etc. Bond issuers include, among others, the Government of Malaysia, Bank Negara Malaysia, quasi government institutions, corporations as well as multilateral development banks (MDBs). To date, a total of seven issuances of MDB bonds, totalling RM3.7 billion have been issued in Malaysia. More importantly, Malaysia, among the key Islamic financial centres, offers a wide variety of Islamic bonds that are based on Shariah compliant concept. As at end-July 2007, Islamic bonds accounted for 33% of total bond outstanding As at end-July 2007, the size of the bond market reached RM527.3 billion, approximately 92.1% of GDP. The bond market has a balance mix of both public sector and private sector bonds each contributing 55.5% and 45.5% share of total bond
outstanding respectively. Today, the corporate bond market makes up approximately a quarter of the total debt financing (including bank loans) to the economy compared with around 10% in 1997. Such rapid growth is a reflection of the expanding private sector financing needs, especially the considerable infrastructure development needs in Malaysia, which require more long-term financing, have provided a strong impetus to the market.
A wide variety of debt securities products are available in the Malaysian bond market, such as fixed coupon bearing bonds, floaters, asset-backed securities, convertible bonds, callable bonds, etc. Bond issuers include, among others, the Government of Malaysia, Bank Negara Malaysia, quasi government institutions, corporations as well as multilateral development banks (MDBs). To date, a total of seven issuances of MDB bonds, totalling RM3.7 billion have been issued in Malaysia. More importantly, Malaysia, among the key Islamic financial centres, offers a wide variety of Islamic bonds that are based on Shariah compliant concept. As at end-July 2007, Islamic bonds accounted for 33% of total bond outstanding.
Equity
Equities offer considerable potential for capital growth and are long term risk investments. It involves company shares which represents part ownership by the investor in a particular company. Ownership of equities will often entitle the investor to a portion of the company's profits through dividends. Share Capital A share is a security which represents a portion of the owner's capital in a business. Shareholders are the owners of the business and share the success or failure of the business. The performance of the business can often be measured by the amount of dividends shareholders receive and by the price of the share, quoted on the stock market. (Shares are also commonly referred to as stock).
The different types of shares which are traded on Bursa Malaysia include: a. Ordinary Shares
Also called equity shares, this is the risk capital of a company . Ordinary shares give holders the rights of ownership in the company, such as the right to share in the profits, the right to vote in general meetings and to elect and dismiss directors. Obligations of ownership are also conferred and this may result in the loss of an investor's money if the company is unsuccessful. Ordinary shares usually form the bulk of a company's capital and have no special rights over other shares. In the event of liquidation, ordinary shares rank after all other liabilities of the company. b. Preference Shares These are shares which carry the right to dividend (normally fixed) which ranks for payment before that of ordinary shareholders. Preference shares may be preferred also as regards to distribution of assets upon dissolution of the company. Preference shares generally carry no voting rights, but voting rights may be made contingent upon failure to pay dividends on preference shares for a certain period of time. There are various types of preference shares:
i.
ii.
iii. iv.
v.
Participating preference shares are entitled to participate in the profits beyond the fixed dividends, by way of an additional fluctuating dividend if the company is successful. Cumulative preference shares are preference shares which, apart from having a preferential right to receive a fixed dividend ahead of ordinary shares, also carry the right of any arrears of the preference dividends which may have built up. Non-cumulative preference shares are preference shares which are not entitled to any arrears in dividends. Redeemable preference shares may be redeemed by the company at a stated redemption price on advance notice of a period of time. It is usual to set a redemption price above the par value to compensate the owner for the involuntary loss of his investment. Convertible preference shares are preference shares which carry the right to be made convertible, at the option of the holder, into another class of shares, normally into ordinary shares.
Derivative
Derivatives are financial instruments used to manage one's exposure to today's volatile markets. A derivative product's value depends upon and is derived from an underlying instrument, such as commodity prices, interest rates, indices, and share prices. Futures and options are essentially elementary derivative products mostly traded on exchanges. A futures contract is an agreement between two parties to buy or sell the underlying instrument at a specific time in the future for a specific price determined today. An option however, provides the holder/buyer the right, but not the obligation, to purchase or sell a certain quantity of the underlying instrument at a stipulated price within a specific time period by paying a premium. The following products are currently traded on the Exchange: Equity Derivatives FTSE Bursa Malaysia KLCI Futures (FKLI) FTSE Bursa Malaysia KLCI Options (OKLI) Single Stock Futures (SSFs) Commodity Derivatives Crude Palm Oil Futures (FCPO) USD Crude Palm Oil Futures (FUPO) Crude Palm Kernel Oil Futures (FPKO) Financial Derivatives 3 Month Kuala Lumpur Interbank Offered Rate Futures (FKB3) 3-Year Malaysian Government Securities Futures (FMG3) 5-Year Malaysian Government Securities Futures (FMG5) 10-Year Malaysian Government Securities Futures (FMGA)
Offshore Based in Labuan, the offshore exchange in Malaysia facilitates the listing and trading of various financial instruments and securities which are based on both conventional and Islamic principles. It is managed by the Labuan International Financial Exchange (LFX), and is wholly owned by Bursa Malaysia Berhad. The LFX caters the need of global market investors due to its capabilities in dealing with multi-currency financial instruments, its duty-free transactions, accessibility, flexibility and much more. Being a web-based Exchange, participants in the LFX can access the trading system 24 hours and 7 days a week. It also works as a one-stop financial exchange centre where applications, approvals, listing, trading, clearing and settlements can be done efficiently.
Exchange-Traded Fund (ETF) ETFs invest in a group of stocks or bonds or other instruments which track the performance of an index. ETFs are listed and traded on a stock exchange. TRADE LIKE STOCKS Just like stocks, you can buy and sell anytime throughout the trading day;. FULLY T RANSPARENT Prices are available real-time throughout the trading day. What¶s more - the investment portfolio is fully transparent as it tracks an index; and
EFFICIENT WA Y TO DIVERSIF Y You can easily gain exposure to a group of securities ± in a single transaction & at a lower cost compared to managed funds.
Islamic Markets Bursa Malaysia, a single exchange group, is designed to meet the growing demands of both foreign and local investors. We offer a holistic range of innovative Islamic Market products from equities, derivatives, commodities, to debt securities, across all sectors and industries: SHARIAH-COMPLIANT STOCKS 88% of the securities currently listed on Bursa Malaysia are Shariah-compliant and represent two-thirds of Malaysia¶s market capitalisation. At Bursa Malaysia, choices are abundant as investors have access to an extensive selection of Shariah-compliant stocks across diversified industries for broader and deeper investment portfolios.
ISLAMIC EQUITY INDICES We are the world¶s only exchange with three comprehensive and transparent Shariah screening processes: FTSE Group, Yasaar Ltd and the SC¶s Shariah Advisory Council (SAC). These screening processes that look at both qualitative and quantitative measures help us meet local requirements and align us with international standards. The FTSE Hijrah Shariah index (FBM Hijrah Shariah) and the FTSE Bursa Malaysia EMAS Shariah index (FBM EMAS Shariah) provide a broad benchmark for Shariahcompliant investment. These indices are designed for investors who wish to invest in Shariah-compliant stocks that are consistent with Shariah principles.
SUKUK (ISLAMIC BONDS) The sukuk market has been the driver of growth for the Malaysian Islamic Market with many world¶s first issues, cemented by sizable amount and innovative structures. Malaysia is one of the largest sukuk issuance centres in the world and accounts for approximately two-thirds of the global sukuk outstanding. We also provide a facilitative and progressive environment for sukuk issuance by local and international issuers. Issuing sukuk in Malaysia is cost-effective as International Issuers have the flexibility to issue either ringgit or non-ringgit denominated sukuk using international documentation, based on UK or US laws and the choice of international credit rating agencies.
SHARIAH ETF ETF has been one of the most innovative investment vehicles over the last two decades. We are the first to list Islamic ETF in Asia. Unlike other conventional ETFs, Shariah ETF is an excellent alternative for investors seeking Shariah-compliant investment instruments. The Dow Jones Islamic (DJIM) index tracks amongst the largest blue chip listed Malaysian Companies that comply with Shariah investment guidelines. With 85%of the securities listed on Bursa Malaysia being Shariah-compliant, we are perfectly placed to create a variety of Islamic ETFs that are transparent and cost-effective, providing greater access for investors to efficiently diversify.
ISLAMIC REITs To keep pace with the ever-changing appetite of investors, Malaysia proactively provides innovative Islamic Market products that best meet the market demand. Apart from being the first to introduce Islamic REITs guidelines, we have the world¶s first plantation REITs and hospital REITs. We are also the first jurisdiction in global Islamic financial universe, as well as the first market in the world to list an Islamic REITs. These efforts have facilitated the creation of a new asset class for investors and fund managers to diversify investment sources and portfolios. SHARIAH-BASED UNIT T RUST FUNDS For industry players who wish to invest in a diversified portfolio of Shariah-compliant securities, we have for you the options of Islamic equity funds, sukuk funds and other funds - managed by competent and professional managers in accordance to the Shariah principles.
ISLAMIC STRUCTURED INVE STMENT PRODUCTS Malaysia¶s wide range of Islamic products caters to various investment styles and meet specific risk profiles, attractive return requirements and high market expectations. Via our local and international brokers, our innovative Islamic structured investment products offer unique opportunities that allow for better risk management and provide investors with valuable portfolio diversification tools in a vibrant market environment. OFFSHORE ISLAMIC MARKETS The Labuan International Financial Exchange (LFX), a web-based financial exchange provides further impetus to the development of offshore Islamic Markets. This wholly owned subsidiary of Bursa Malaysia is based in Labuan IOFC, a tax haven, and is regulated by the Labuan Offshore Financial Services Authority (LOFSA). LFX offers listing and trading facilities for a wide range of financial and non-financial products, as well as Islamic financial products. The rules of LFX are designed to be liberal and cater to the listing of a variety of multi-currency securities and instruments while offering speedy approval processes and attractive tax benefits.
Commodities
The Commodities sector has historically been a major generator of economic activity. Despite the nation¶s major transition from a largely agriculture-based to manufacturing economy in the early 1980s, commodities remain a major income earner. Thrust One of the Ninth Malaysian Plan states the Government's intention to grow the economy through the agricultural and commodities sector. Adapting to changing world demand, the Malaysian commodity sector has also gone through transitions. Malaysia today focuses on oil palm, rubber, timber, tobacco, pepper and cocoa as its main commodities. Growth in these areas are supported by technology advancement.
RISK ON
ALTERNATIVE
INVESTMENT
Depending on the nature of the investment, the type of investment risk will vary. BUSINESS RISK
Business risk refers to risk of doing business in a particular industry or environtment. It is the degree of uncertainty as associated with an investment¶s earnings and the investment ability to pay the return (interest, principal, dividends) owned investors. Much of the business risk associated with a given investment vehicle is related to its kind of business. FINANCIAL RISK
The degree of uncertainty of payment attributable to the mix debt and equity used to finance a business. Financial risk is related to the use of debt financial by a company. The larger the proportion of debt used to finance an investment the greater is the change the company is unable to service the interest and debt, therefore the greater is the financial risk. PURCHASING POWER RISK
The change that changing price levels (inflation or defletion) will adversely affect investment returns is purchasing power risk. Specifically, this risk is the chang that generally rising prices (inflation) will reduce purchasing power (the amount or a given commodity that can be purchased with a dollar). INTEREST RATE RISK
Interest rate risk is the change that changes in interest rates will adversely affect a security value. The interest rate changes themselves result from changes in the general relationship between the supply or and the demand for money. As the interest rates change, the prices of many securities fluctuate ; they typically decrease with increasing interest rates, and they increase with deceasing interest rates. Most of investment vehicle are subject to interest rates risk. Although fixed income securities are most directly affected by interest rates movement, they also affect other long-term vehicle such as common stock and mutual fund. Generally the higher the interest rate, the lower the value of an investment vehicle, and vice versa. LIQIUDITY
RISK
Is the risk of not being able to not liquidate an investment conveniently and at a reasonable price is called liquidity risk. In generally, investment vehicles traded in thin markets, where demand and supply are small, tend to be less liquid than those traded in boarded markets.
MARKET RISK
Market risk is the risk that investment returns will decline because of market factor such as political event, economic, and social event as well as changes in investor tastes and preferences. Market risk actually embodies a number of different risk ; purchasing power risk, interest risk essentially, market risk is reflected in the price volatile of a security. EXCHANGE RATE OR CURRENCY RISK
Exchange rate or currency risk is the variability of returns coursed by currency fluctuations. Return received from investment abroad may reduce in value due to weak currency exchange. INVESTOR·S
LEVEL
OF RISK
The degree to which investors are willing to commit funds to stocks depends on risk aversion. Investors are risk adverse in the sense that, if the risk premium were zero, people would not be willing to invest any money in stock. The investors¶ level of risk is the concept that should be address to determine amount of risk preferred by investors. Risk averse investors is an individual who, when given a choice between two investments with equal expect returns, will always choose the investment with the lowest variance. Investors who are indifferent between two investments having and equal returns but different variances is said to be risk neutral or risk indifferent. A riskseeking or risk taking investor is one who will actually choose the riskier of two investments offering the same expect payoff. Individual risk preferences are ultimately based on a person¶s utility function ± defined as tradeoff. Investors choose to make between current and future wealth, and between current consumption opportunities and the financial security that comes from an investment portfolio, in order to maximize his or her level of personal satisfaction.
REFERENCE http://en.wikipedia.org/wiki/Alternative_investment http://www.investopedia.com/terms/a/alternative_investment.asp http://bondinfo.bnm.gov.my/portal/server.pt?open=514&objID=27275&parentname=MyP age&parentid=0&mode=2&in_hi_userid=22874&cached=true http://www.klse.com.my/website/bm/products_and_services/index.html http://www.klse.com.my/website/bm/products_and_services/derivatives.html http://www.klse.com.my/website/bm/products_and_services/offshore.html http://www.klse.com.my/website/bm/products_and_services/exchange_traded_fund/ind ex.html http://www.klse.com.my/website/bm/products_and_services/islamic_capital_market/ http://www.malaysia.gov.my/EN/Relevant%20Topics/IndustryInMalaysia/Business/Busin essCommodity/Pages/BusinessCommodity.aspx Fundamental of Investment. UPENA UiTM, 2008 by Nik Maheran, Zetty Zahureen & Nurazleena Ismail
