Dutch Pillarisation, Malaysian Rojak

Pillarisation (or verzuiling in Dutch) is the state of a society that is divided into groups that self-segregate. Until the 1960s and 1970s, the Netherlands was a country whose population was divided along sectarian lines. There was a Catholic pillar, a Protestant pillar, a Socialist pillar and a Liberal pillar. These groups had their own schools, broadcasters, newspapers, political parties, labor unions, employer federations, universities, hospitals, shops and sports clubs. Marriage and friendships between families from different pillars were either discouraged or simply not allowed. The Catholic school kids would always fight with the Protestant school kids. A good Catholic would only buy from Catholic shops. The priest or minister would make house visits to ensure everything was being done “correctly”. The Netherlands was a segregated society with extensive social control within the respective pillars.

To a Malaysian this system may seem strangely familiar, as Peninsular Malaysia has its own racial-linguistic pillars: Malay, Tamil, Chinese and English. Each has their own media outlets, political parties, educational institutions, neighborhoods, popular shopping malls, cuisine, places of worship, social clubs, chambers of commerce, etc. And while Malaysians of different races do mix regularly, especially in the workplace, the number of Malaysians who marry or maintain deep friendships across racial lines, is relatively limited. Within many groups there is still a strong sense of social control, and opinion polls show that a large segment of Malaysian society is still very conservative regarding social issues.

The big difference between Malaysia and the Netherlands is racial and linguistic: the Netherlands during pillarisation was, for all intents and purposes, a mono-lingual and mono-ethnic country. Malaysia of course is multi-racial and multi-lingual. Malaysians often refer to their society as ‘Rojak’, a salad of fruit, vegetables and sometimes egg and tofu, all mixed together and covered in a sauce. The point is that each of the items in the salad retains their individual characteristics, they do not melt or assimilate into one uniform Malaysian soup or porridge. There is only a Malaysian sauce that unites them.

In the Netherlands more progressively minded individuals from within each pillar tried to break down barriers between them. The Netherlands became a much less religious and more individualistic society during the later part of the 20th century, and this weakened the social control from within the pillars. This loosening eventually lead to various mergers between labor unions, political parties, broadcasters, etc. Schools accepting students from diverse backgrounds. Inter-religious marriages and friendships losing their stigma. Today the process of de-pilarisation in the Netherlands that took place in the 1960s and 1970s is primarily seen as a social process which brought about institutional and political change.

Since the 1990s the Netherlands is widely seen as one of the most liberal countries, having legalized prostitution, soft drugs, gay marriage and euthanasia, all abhorred by the conservatives. However this is not to say that all religion or conservative values have disappeared. In fact, the Netherlands is also home to a substantial ‘bible belt’ of mainly conservative Protestants, who have maintained their pillars. The stereotype is of large conservative families, who attend church regularly, strictly observe Sunday as a day of rest, and in some cases, oppose modern technologies such as television and vaccinations. This diversity in views is represented in the Dutch parliament: there is a conservative political party that would like to deny women the right to vote, a party for animals, a party that would like to deport all Muslims and recently, a party that fights (only) for the rights of Muslims.

So does the Dutch experience suggest that Malaysia will inevitably de-pillarise? That the ‘Rojak’ will become ‘Laksa’ or ‘Bubur’? If anything, modern Malaysia seems to have pillarised more since independence. Many Malaysians growing up during the 1950s and 1960s in Malaysia remember a more multi-ethnic society in areas such as education or the civil service. Yet this may also have been an illusion of the elite: Malaysian society at the level of the working class was perhaps always more deeply divided along racial and religious lines. Government policy since independence has largely aimed to maintain or reinforce those divisions, perhaps primarily as a tool to maintain social control, and not dissimilar to the ‘neat’ political divisions in the Netherlands after World War II.

What should be remembered is that Dutch de-pillarisation was accompanied by a phenomenal economic transformation of the country after 1945. In Malaysia, arguably a greater degree of de-pillarisation has occurred in more prosperous urban areas, such as the Klang Valley. In those areas more multi-ethnic parties tend to perform well in elections, presumably reflecting different social values of the local population. Ethnic-based parties tend to perform better in less prosperous rural areas of Malaysia.

While Malaysia will not experience de-pillarisation in the same way that The Netherlands has, the comparison with The Netherlands suggests two things that might be relevant in a Malaysian context. First, that socio-economic changes are the main drivers of the cultural and political changes that brought about de-pillarisation. Second, that the pillars — the institutions, social bonds, ways of life — will survive, although they will lose influence.

Index Investing at Bursa Malaysia

Index investing is very popular, especially in Europe and North America but perhaps less so in Asia. The idea behind index investing is simple: because an average investor cannot beat the market consistently over long periods of time, you are best off putting your money in a well-diversified investment fund and spend your time instead on other things, like playing with your kids, improving your golf handicap, updating your social media accounts, running your business, etc.

Research suggests that professional fund managers also don’t beat the index consistently, so you will probably also fail to beat the index if you try to pick the “best” actively managed mutual fund (for background get a hold of Malkiel’s A Random Walk Down Wallstreet and Bogle’s Common Sense on Mutual Funds). Since managed mutual funds tend to have higher charges, that’s another reason to choose an index fund.

But all of this research is typically based on the realities in North America and Europe: large, liquid, (supposedly) well-regulated and sophisticated markets. What about a market like Malaysia’s that’s relatively small and often dominated by large family-owned or government-owned firms. Do index funds beat mutual funds in Malaysia too?

Let’s Hypothesize

Factors that might make Malaysia’s stock market unlike that of North America and Europe is the fact that:

  1. Malaysia’s stock market has some regulatory and governance issues (loads of examples here), although these tend to occur with smaller companies that are not included in indexes like the FTSE Bursa Malaysia KL Composite Index ,
  2. Malaysia’s economy has some political patronage going on too, as well as large family-controlled businesses through which minority shareholders may get the short end of the stick when they invest in these companies (see also Gomez & Jomo’s Malaysia’s Political Economy: Politics, Patronage and Profits and Studwell’s Asian Godfathers: Money and Power in Hong Kong and South East Asia),
  3. Malaysia’s economy is largely dominated by government-owned companies. Among the 10 largest companies by market capitalization listed on Bursa Malaysia in Sept 2020, 6 have the government as a major shareholder: Tenaga Nasional, Maybank, CIMB, Petronas, Axiata and Sime Darby (see also Gomez et al’s Minister of Finance Incorporated: Ownership and Control of Corporate Malaysia). Significant government ownership means that Malaysia’s national (or political) interest may drive corporate decision-making, rather than shareholder return. If anyone needs a case study in how government-linked companies can be mismanaged: remember the FGV saga?

All of this taken together means that (similar to Singapore) the top tiers of the Malaysian stock market are typically filled with rather conservative family or state-owned firms engaged in financial services, utilities or plantations. There are no Googles, Samsungs or Tencents to drive growth like in the US, Korea or China. In such an environment stock-picking might actually be a way to consistently beat the stock market index because it would mainly involve avoiding the “dead wood” state- and family-owned businesses.

Running the Numbers

So how do we test this theory? Lacking access to any fancy data sets from Bloomberg or Reuters, I used the Fund Selector function from FundSuperMarket (FSM One), a discount local mutual fund brokerage. If selecting funds with asset class Equity and their geographic focus on Malaysia around 62 funds provide a total return figure (capital appreciation + dividend) for the past 10 years. Of those 62 funds, 25 are Shariah-compliant funds (including 1 index fund) and 37 are conventional funds (including 2 index funds).

There is a large difference between the conventional and shariah funds in terms of their holdings, and that difference is financial institutions. Most of Malaysia’s large banking groups (Public Bank, Maybank, CIMB) have a conventional banking unit engaged in usury (conventional interest-baring loans, which aren’t allowed under Shariah) and so are removed from the Shariah funds. For this reason its meaningful to make separate comparisons between conventional managed funds vs. index funds and Shariah managed funds vs. index funds.

Finally it must be noted that the index funds must invest in large-capitalization stocks (all follow the relevant FTSE Bursa Malaysia index) whereas managed funds can and do invest in smaller and medium-capitalization stocks. And there could be some survival bias: poorly performing managed funds may have been closed down. Nevertheless, we attempt a comparison…

From the results it appears that in both categories (conventional and Shariah) the managed funds on average outperform the index funds. For conventional funds this gap is 3.61% but for Shariah funds its just 0.12%. So in that sense our hypothesis of Malaysia being different from North America and Europe, seems to hold, although for the Shariah funds, only by 0.12%, which may be within the margin of error.

Also noteworthy is that the Shariah index fund (average +5.12%) has significantly outperformed the Conventional index funds (average +1.98%). Taken over 10 years, that’s a stunning gap of 31.4%. If you had put your money in a Fixed Deposit you would probably have beat conventional index funds over the last 10 years. Ouch!

Fund Type10 Year Average
Annual Return
Conventional Index Funds (2 funds)+1.98%
Conventional Managed Funds (35 funds)+5.59%
Performance Gap+3.61%
Comparing Conventional Malaysian Equity Funds (data: FSM One, 8 Feb 2021)
Fund Type10 Year Average
Annual Return
Shariah Index Fund (1 fund)+5.12%
Shariah Managed Funds (24 funds)+5.24%
Performance Gap+0.12%
Comparing Shariah Equity Funds (data: FSM One, 8 Feb 2021)

Analysis

So how can we better understand these surprising figures of out-performing managed and Shariah funds compared to the conventional index funds?

Two quick explanations come to mind. First, the conventional FTSE Bursa Malaysia KLCI index contains 3 large financial groups which are not a part of the Shariah index. Those financial institutions seem to have been a large drag on the conventional index funds’ returns.

Second, the fees of the index funds are substantial. Whereas many popular index funds in North America or Europe charge around 0.2% in management fees, the fees charged by Malaysian index funds, especially the conventional ones, are high. RHB’s KLCI Tracker charges 1.50% per year (comparable to a Malaysian managed funds) and Principal’s KLCI-Linked Fund charges a little less, but still 0.95%. PMB’s Shariah Index Fund only charges 0.60% as a management fee, which makes a big difference, especially when they compound over the long term.

Therefore the out-performance of Malaysian managed funds during the past 10 years seems to be largely explained by their ability to avoid investing in some large but under-performing stocks which may have structural governance issues by virtue of their family ownership, government ownership or some kind of political exposure. A profit-maximizing fund manager may therefore be able to avoid these stocks, but they nevertheless dominate the index because the size of the firms and ownership by government investment funds keeps their market capitalization high.

So what’s a lay investor to do? Well, managed mutual funds may not be a bad way to invest in the Malaysian stock market after all. Now the next challenge: figuring out which ones to buy.

Disclosures

The data used to make the calculations is available here.

I am a customer of FSM One and own fund(s) that were included in this analysis but I did not receive any compensation from FSM One, fund managers or any other related party in relation to writing this piece.

The Regional Economies of ASEAN

The 10-members of the Association of Southeast Asian Nations (ASEAN) are vastly different in terms of their size, level of economic development, religion, language and cultures. Within the larger member states, such as Indonesia, the Philippines or Vietnam, there are also great differences between regions. This post is a very brief analysis of the regional economies of ASEAN based on the data from Wikipedia’s List of ASEAN country subdivisions by GDP.

While there are some caveats to comparing regions (subdivisions), such as differences in population on geographic size and the fact that some economic areas cross domestic and international boundaries (think about SiJoRi, Singapore-Johor-Riau) and that Wikipedia’s list seems incomplete (where did Kelantan go?), the comparison nevertheless provides an idea about what the major economic centers of ASEAN are. The comparison uses Purchasing Power Parity (PPP) statistics to account for the often large differences in cost of living.

ASEAN’s Largest Metropolitan Economies

The list of ASEAN’s largest metropolitan economies is shown in the table below and lists Jakarta as the largest metropolitan economy (by far), followed by Singapore, Bangkok and Manila (all in the US$500-600 billion range) with Malaysia’s Klang Valley in #5 position. Immediately noticeable are the large differences in population size: Jakarta’s more than 33 million population compared to Singapore’s population of “only” 5.7 million.

At the bottom of the table, Surabaya (#2 in Indonesia) is similar in economic size to Ho Chi Minh City (#1 in Vietnam) and that Hanoi (#2 in Vietnam) is similar in size to Bandung (#3 in Indonesia).

RankMetropolitan RegionPopulationGDP-PPP (US$ billion)
1Jakarta metropolitan area33,926,330978,490
2Singapore5,670,180585,060
3Bangkok Metropolitan Region15,931,300575,160
4Greater Manila Area25,766,930528,440
5Klang Valley (Kuala Lumpur)8,026,970372,560
6Surabaya metropolitan area9,885,400250,460
7Ho Chi Minh City metropolitan area13,848,400244,820
8Hanoi Capital Region9,957,100144,810
9Bandung metropolitan area8,598,530122,780
ASEAN’s largest metropolitan economies (2017-2019) — Wikipedia

ASEAN’s Most Prosperous Regions

Because of the large differences between metropolitan regions in terms of their population sizes, its also useful to have a look at GDP per capita (PPP). Here we look not only at the metropolitan areas but at all the regions listed on the Wikipedia page because smaller non-metropolitan regions can have high income levels.

As expected Singapore ranks #1, but its perhaps surprising that the city state is followed by Kuala Lumpur instead of Brunei, and then Jakarta and Bangkok. This suggests that there is a large concentration of high income in the capital cities of Malaysia, Indonesia and Thailand.

As one continues down the list East Kalimantan (#6) is next and then Eastern Thailand (#7). East Kalimantan is a largely rural province of Indonesia but has a large oil & gas sector and will be home to the new Indonesian capital. Eastern Thailand lies east of Bangkok and is home to, among others, the beach resort of Pattaya and Thailand’s newly launched Eastern Economic Corridor.

Next are four Malaysian states: Penang is home to a large electronics industry, Sarawak also has a small population and large oil & gas sector, Selangor borders the Malaysian capital, Kuala Lumpur and Malacca is a small state, also home to an electronics industry. Samut Sakhon borders the Thai capital Bangkok. Negri Sembilan is still within a 1-hour driving range of the Malaysian captial and the aformentioned state of Malacca. The Riau Islands border Singapore. Samut Prakan also borders Bangkok.

Thus the high-income regions of ASEAN tend to either be major economic centers (e.g. Jakarta, Singapore, Bangkok, Kuala Lumpur), are located near those large economic centers (e.g. Selangor, Samut Sakhon or Riau Islands) or have a large oil & gas sector (Brunei, East Kalimantan and Sarawak).

The exceptions to this rule are Malaysian states like Penang and Malacca, which are all located on the country’s West Coast and share historical and cultural similarities with Singapore and Kuala Lumpur.

Notably absent from the list is Manila and also Ho Chi Minh City and Hanoi: major metropolitan economies which are not among the more prosperous economic regions of ASEAN.

RankRegionGDP-PPP
per capita (US$)
1Singapore103,181
2Kuala Lumpur83,857
3Brunei80,383
4Jakarta62,549
5Bangkok46,056
6East Kalimantan40,833
7Eastern Thailand40,179
8Penang36,224
9Sarawak36,157
10Selangor35,624
11Malacca33,156
12Samut Sakhon33,009
13Negeri Sembilan29,761
14Riau Islands28,460
15Samut Prakan27,543
ASEAN’s Most Prosperous Regions (2017-2019) — Wikipedia

Final Thoughts

The vast regional differences within ASEAN countries are actually quite surprising. While Malaysia is home to Kuala Lumpur (GDP PPP per capita of US$84k) its also home to Kedah (GDP PPP per capita of US$15k), an income gap of more than 5 times! And even if Kuala Lumpur is seen as an extreme, income levels in Penang, which borders Kedah, are already twice as high as those in Kedah. Within Indonesia and Thailand you can find similarly large differences.

So while its often emphasized that income levels between Singapore and its neighbors are vast, they are also vast within countries, including in a relatively small country like Malaysia. Perhaps that’s the real story behind ASEAN’s economic diversity.