Does Misclassification of Equity Funds Exist? Evidence from Malaysia

Applying the style analysis developed by Sharpe (1988, 1992), this paper investigates the classification of equity funds in Malaysia. A methodology for creating purified mutual fund style indexes is used to verify existing classifications. The paper concludes that an improper classification of funds would not only cause mismatch between investors objectives and funds’ profile, it also affects the process of income smoothing in the lifecycle of investors. Besides estimating the possible economic impact due to misclassification, this study highlights the importance of a proper classification system of equity funds in Malaysian context and its implication towards investor’s protection.Mutual Fund Classification; Style Analysis; Investor’s Protection

Determinants of Pension Fund’s Required Return: A Scenario-based simulation of Civil Service Pension Fund

This study examines the required return to fund a defined pension benefit of the Civil Service Pension Fund, managed by KWAP. Based on the four variables, contribution rate, retirement age, life expectancy, and length of service, this study simulates 648 scenarios of required return corresponding to the years of service and post-retirement benefits. Our findings show: First, the minimum years of service for the pension eligibility shall be increased to 20 years. Second, the Government shall increase the contribution rate to at least 13% per worker to KWAP. Third, there are no significant changes in the required rate of return even though the Government extended the retirement age from 55 to 60. Hence, extending the retirement age will not reduce the pension cost. Fourth, this study shows that the contribution period is more crucial than the post-retirement period for the Government to sustain the pension fund. Lastly, there is a need for the Government to set a minimum funding ratio for the KWAP pension fund to ensure its long-term sustainability. As a policy suggestion, the current pension fund needs refinement to ensure long-term sustainability

Impact of Foreign Exchange Administration Rule on the Nexus between Country-Specific FDI and Malaysian Currency

In the aftermath of the US Presidential election on 8 November 2016, the Malaysian currency Ringgit (MYR) had witnessed unprecedented volatility in its value relative to the USD. As a policy response, Bank Negara Malaysia (BNM) implemented a Supplemental Foreign Exchange Administration (SFEA) Rule in December 2016. Exporters are required to convert 75 per cent of foreign currency proceeds from the exports of goods into MYR with a licensed onshore bank. This study evaluates the impact of the new SFEA Rule on the relationship between country-specific FDI and MYR. Based on the data of five major inward FDI countries from 2015 to 2018, our results show: Firstly, Japanese FDI strengthens MYR in post-SFEA Rule; Secondly, FDI from Singapore is found to exert downward pressure on MYR; Thirdly, FDI from China, the Netherlands and the US are insignificant in influencing the MYR; Finally, inward FDI from different countries responds differently to the Rule. Notably, the results obtained are robust to different measures of the exchange rate. On policy suggestion, the Foreign Exchange Rule should also target non-export oriented inward FDIs to achieve the policy target. The result also highlights the importance of export-oriented FDIs for the long-run benefit of the Malaysian economy

INFORMATION FLOW BETWEEN THE US DOLLAR-RUPIAH EXCHANGE RATES

This study investigates the information flow between non-deliverable forward (NDF), spot, and forward US dollar–rupiah exchange rates during the post-Quantitative Easing (QE) period. Our results show a unidirectional information flow from NDF to the spot and forward rates in the post-QE period. We also find that the Indonesian government securities (IGS) played a vital role during the QE period, while international reserves preceded the US dollar–rupiah spot, forward, and NDF exchange rates post-QE. Hence, international reserves became an important policy variable in managing the currency value. Our finding redefines the role of IGS as a policy tool. As a policy suggestion, the Bank Indonesia should maintain a sufficient amount of foreign reserves to mitigate foreign exchange risks of the rupiah.This study investigates the information flow between non-deliverable forward (NDF), spot, and forward US dollar–rupiah exchange rates during the post-Quantitative Easing (QE) period. Our results show a unidirectional information flow from NDF to the spot and forward rates in the post-QE period. We also find that the Indonesian government securities (IGS) played a vital role during the QE period, while international reserves preceded the US dollar–rupiah spot, forward, and NDF exchange rates post-QE. Hence, international reserves became an important policy variable in managing the currency value. Our finding redefines the role of IGS as a policy tool. As a policy suggestion, the Bank Indonesia should maintain a sufficient amount of foreign reserves to mitigate foreign exchange risks of the rupiah

Nexus Between Official Development Aid, Institutional Quality and Economic Growth: Evidence from CLMV countries

This study examines the effect of country-specific Official Development Aid (ODA) and institutional quality on economic growth for Cambodia, Laos, Myanmar, and Vietnam (CLMV) countries from 2002 to 2017. Our results indicate that: First, the impact of ODA from Germany, Japan and France on economic growth is conditional on the level of institutional quality of CLMV countries. The ODA has a negative impact on growth when institutional quality is low. Beyond a threshold of institutional quality, ODA promotes economic growth. Second, the results are robust after controlling for outliers and endogeneity in the model. Third, the further analysis provides evidence that the mitigating effect of institutional quality works through both labour productivity and human capital growth channel. Based on the findings, this study offers some imperative policy recommendations to both donor countries and ODA recipients

The Interaction Effect of Heuristic Representation on Initial Public Offering Anomaly: Evidence from Flipping Activity

This study examines the impact of the heuristic representation on IPO anomaly in the context of an emerging market from January 2006 to December 2016. Models consist of multiple regression has been evaluated. Our results show: firstly, the distribution of initial return, oversubscription ratio, firm age, offer period, firm size, heuristic representation, and flipping activity are positively skewed; Secondly, the oversubscription ratio has a positive relationship with flipping activity. This is because higher demand makes investors flip more to liquidate the IPO on the first trading day. In contrast, firm size has a negative relationship with flipping activity. A larger IPO firm is more stable in terms of performance, and less risky in terms of business operation; Thirdly, heuristic representation influences the relationship between oversubscription ratio and flipping activity; Lastly, this study dispels the notion that investors are active in subsequent trading but not necessarily obtain a profit from the liquidation. This study extends earlier work by examining the interaction effect of heuristic representation to the flipping activity in an emerging market

Asset Allocation and Performance of Malaysian Civil Service Pension Fund

Managing pension assets for defined benefit plans is a dynamic optimisation process between the strategic allocation and the future liabilities obligations. A pension fund's optimal asset and liability structure will eventually determine the pension fund's performance. This study examines the Civil Service Pension Fund, or Malaysia Incorporated Retirement Fund (KWAP). Using the data from 2007 to 2018, our results show: First, KWAP has invested in five main asset classes. Its asset allocation strategy shows an increased risk tolerance with greater weight in equities. Second, real estate is the most performing asset class that contributes the highest ROI, followed by equities. Third, the investment performance of KWAP has deteriorated since 2007 as measured by Sharpe Ratio and M-squared. Fourth, the KWAP is still conservative based on the efficient frontier. It invests mainly in domestic fixed income and local equities. As a policy implication, the KWAP should diversify into an international portfolio as recommended by Capital Market Line