Malaysians seeking to invest in private credit with higher yields now have the option of the Tradeview Funding Societies Income Fund (TFSIF), a wholesale fund designed to provide investors with the income benefits of small and medium enterprise (SME) financing.
The fund is also suitable for existing peer-to-peer (P2P) financing investors who don’t want the complexity of managing individual investment notes, which are essentially debt papers issued by SMEs to raise funds from licensed P2P financing platforms.
“By unitising the investment notes within a fund structure, investors benefit from ongoing valuation [of the assets of the fund] as well as regular [income] distributions. This provides a transparent and accurate single annualised return figure, net of defaults and fees,” says Chai Kien Poon, country head at Funding Societies Malaysia.
TFSIF is a collaboration between Funding Societies Malaysia and boutique asset management firm Tradeview Capital.
Funding Societies holds about 50% of the local P2P market share in terms of the disbursement of funds and 70% in terms of the number of investment notes issued in Malaysia, according to Chai.
Tradeview Capital, meanwhile, has crossed RM100 million in assets under management (AUM) and achieved profitability within three years of its launch.
With a minimum investment amount of RM10,000, TFSIF targets a net return of 6% per annum after credit costs, fees and taxes. The net return is achievable because the underlying SME financing notes typically yield between 9% and 16% per annum on average, explains Chai.
“If the fund consistently delivers its 6% target over a three-to-five-year horizon, it has the potential to be one of the best-performing fixed income funds in the market and we are confident this is achievable,” he says.
A key factor limiting higher net returns today is that the underlying SME financing notes remain taxable. Chai explains how the current tax affects investor returns: A gross yield of about 14% per annum, after accounting for roughly 3% in credit costs and 2% in fees, brings the pre-tax return to around 9% per annum. Taking into account corporate income tax of 24%, the net return to investors is approximately 6.8%, close to TFSIF’s 6% annual target.
“We have been engaging the authorities for some time to seek tax exemptions for this asset class, similar to what is granted for certain other investment products. While we have not been successful yet, we will continue pushing, as any tax relief would ultimately benefit both SMEs and investors by lowering costs and encouraging greater participation,” he says.
Chai adds that investors may redeem up to 5% of the fund’s AUM each month, which is aligned with the fund’s monthly valuation cycle. The fund manager may also allow a higher redemption limit if liquidity permits.
If requests exceed the 5% threshold, the excess will be deferred to the following month on a queue basis. A 1% redemption fee applies only if investors exit within the first 12 months, while redemptions after one year are free of charge.
The fund, designed for high-net-worth investors looking for higher yields and steady monthly income, aims to achieve RM100 million in AUM within the next 12 months.
Funding Societies will continue contributing 10% of net investment deposits into a separately ring-fenced reserve fund overseen by Tradeview until the fund reaches its RM100 million AUM target.
The contribution rate may be reviewed after the first 12 months, but the reserve fund itself will remain a permanent feature to support the monthly distribution if there are late or missed repayments, says Chai.
If the reserve fund falls below the 10% threshold, any subsequent outperformance from the portfolio will first be used to top it back up, with the excess then eligible for performance fees.
“This structure is likely the first of its kind in the market and creates strong alignment between investors, the fund manager and the P2P platform,” he adds.
The fund was launched in October and is currently in its offering stage, with deployment scheduled to begin once the period ends at end-November. Targeted sectors and SME borrowers have already been lined up for investment once capital deployment begins.
Fast deployment of capital into thousands of SMEs
TFSIF consolidates capital into a single portfolio that can be deployed across thousands of SMEs at once, smoothing out the timing risk and reducing default-rate fluctuations, says Chai.
Timing risk refers to the risk of lower overall returns when investor funds remain uninvested or under-deployed for a period of time, causing a “cash drag”.
Chai says investing through a wholesale fund rather than selecting individual P2P notes gives investors immediate breadth of exposure, with diversification across SMEs, sectors and loan tenures.
P2P investors who invest directly in individual notes through platforms typically experience wider swings in annualised returns, especially when their portfolios are small and defaults happen. But as the investment notes and SMEs in their portfolios grow into the hundreds, performance begins to stabilise and converges into a more predictable range.
It is becauase of a similar rationale that TFSIF, which allows investors to quickly deploy their money into a big portfolio of investment notes, can deliver better and more consistent performance to investors over time, says Chai.
“If you want to invest RM100 in a business, it will take a very long time to build your portfolio of, let’s say, RM10,000. As a result, some people start making very concentrated bets. If there is one default, your portfolio actually gets whacked quite a bit.
“Now, if you are investing into a fund, the fund could have maybe a few thousand borrowers at the same time. When you buy into it, you actually already buy into a very diversified portfolio.
“And because there is a big pool of assets, the fund manager will also be able to structure products of different tenures. So, there will be repayment coming in every month,” he explains.
The fund structure aims to mitigate several other pain points encountered by P2P investors who invest on their own, including irregular repayments that make returns hard to track and limited note availability, which leads to a lack of diversification and slow deployments of funds, resulting in cash drag.
“Individuals who invest directly in P2P are essentially investing note by note and returns come back at different times. You ask any investor [their] annualised return, and they struggle to give you a number,” says Chai.
“From a layman’s perspective, because money comes back at different periods, it’s very hard to reconcile the differences. By putting it into a fund structure, you can solve that problem. With funds, you will do a valuation in a periodical method and essentially, that’s your return.”
Chai says TFSIF will invest across a broad range of SMEs, including social enterprises, wholesalers, green-sector firms and manufacturing businesses.
A portion will be allocated to secured products such as property-backed, vehicle-backed and CGC-guaranteed notes, which offer lower yields but provide stability and downside protection.
Another portion will go into unsecured, higher-risk-adjusted products such as micro financing to enhance overall yield.
“We will also balance short-tenor notes to support monthly distributions and liquidity for redemptions, with longer-tenor notes to capture higher returns. Over time, as the fund grows, we also plan to diversify across countries to mitigate single-market risk,” says Chai.
Meanwhile, Tradeview will apply a sector lens to ensure industry diversification, reducing exposure to sectors facing macro headwinds, says its chief investment officer Nixon Wong.
TFSIF is entering the market as one of the earliest wholesale funds built on SME financing, giving it a head start. But Wong notes that several fund managers are already exploring similar products and are expected to launch them in the coming months. They may offer target returns of 8% to 12%, higher than TFSIF.
Chai says, however, that TFSIF prefers to focus on a consistent, achievable and sustainable rate of return that will compound over time.
“Over time, the record will speak for itself. Like I said, if we can deliver 6% consistently for the next three years, within the fixed income space, this will be one of the highest-return funds.”
Source: https://theedgemalaysia.com/node/782824