The asset management industry (institutional and retail) in Singapore grew by 12% in 2002, bucking the trend of consolidation in the industry globally.
The growth has been due to a number of international fund houses electing to relocate their operations in Singapore at the expense of Tokyo, Hong Kong and Australia.
These houses include AXA Rosenberg Investment Management, Morgan Stanley Investment and Capital International. Funds previously managed out of Europe and the US are also shifting into Asia where the investments lie. Although the AUM of the industry grew, the number of investment fund professionals in Singapore has however dropped from 1,114 in 2001 to 1,012 at end 2002, comprising 695 portfolio managers, 294 investment analysts and 23 asset strategists.
The unit trust segment of the industry grew by 25% during the period July 2002 - June 2003, with AUM increasing from S$13.3b to S$16.6b. Of the S$3.3b increase, S$1.9b was due to the growth of structured products, principally capital guaranteed and capital protected funds.
UNIT TRUSTS: The percentage of unit trusts, as measured against fixed deposits and savings deposits, has risen from 8.6% in June 2002 to 10.4% in June 2003. Offshore funds
As of July 2002, investors have been able to purchase offshore funds denominated in foreign currencies directly. The funds need to be first approved by the regulator and a local representative also has to be appointed. Investors can purchase these funds using not only cash but also their pension monies in the Central Provident Fund (CPF). The CPF is a defined contribution pension scheme whose assets can be variously used for housing, education, medical treatment and investment.
On the back of this, Fidelity Investments has reopened its office in Singapore. The company had departed in 1997 citing that the pace of liberalisation has been slower than it had expected. Reports are that it will manage about S$2b in assets. The house will offer the largest range of offshore funds for investors here, the expected range being all 75 of its Luxembourg funds.
Until the change in regulations, the mechanism for investors to tap into offshore funds was through locally registered feeder funds. One house, Invesco, announced in June that it will close all its 10 feeder funds, worth S$80m. The dismantling of its feeder fund structure was said to be a move to streamline operations following the approval it received to sell Luxembourg-domiciled funds directly to investors. Polls of other fund managers revealed no immediate plans to follow suit and most are adopting a wait-and-see position.
DISTRIBUTION: The distribution channels of unit trusts have continued to expand. The distribution of unit trusts has traditionally been via the bank network, largely through the branches and to a lesser extent the Automated Teller Machines (ATMs) and bank websites. The banking network is employed by both local fund houses and international ones. The latter depend significantly on the network of the foreign banks, in particular Citibank and Standard Chartered, for the successful distribution of their funds. There are six foreign banks who have received Qualifying Full Bank (QFB) status and who are able to compete on more direct terms with the local banks in terms of delivery channels. The six are Citibank, Standard Chartered, ABN Amro, HSBC, BNP and Maybank.
Unit trusts are also distributed directly by the fund houses themselves, online distributors and broking houses. Internet distributors typically operate by offering discounts on front-end loads but they compete on not just simply price and also seek to offer wider range and information. For broking houses, the distribution of unit trusts provides alternative revenue following the deregulation of the broking commission.
The Financial Advisors Act (FAA) was implemented in the second half of 2002.
Individuals who are licensed as Independent Financial Advisors (IFAs) are now permitted to give advice and distribute unit trusts. Employees of banks are exempt from the need to obtain the license although they are still required to comply with similar codes of behaviour. With the implementation of the FAA, pure 'distribution' of unit trusts is now possible and several foreign financial planning providers have established or are establishing operations in Singapore.
Finance companies also entered the distribution scene in April 2003. A local company, Hong Leong Finance, has been the first to be granted a license to market investment funds. The company has 28 branches. Given the customer base of the finance company, with traditional deposits and loans as the mainstay, the sales in unit trusts have been predominantly in the guaranteed and protected products.
FUND ADMINISTRATION: Bermuda Trust has tied up a local bank, United Overseas Bank, to form an automated unit-holder registration service. The services provided will include straight-through processing of subscriptions and redemptions by unit-holders. There will also be an automated link to the Central Provident Fund (CPF), the pension scheme from which investors are able to use their monies for investing in unit trusts. The venture will also provide services to calculate the different fee structures of fund distributors, a job that is currently carried out manually. Market data will also be given to distributors.
LEGAL AND REGULATORY DEVELOPMENT REGULATORY NEWS CONCERNING INVESTMENT FUNDS: There is now a "cooling-off" period for all unit trusts sold. The new ruling gives investors the option of cancelling their purchases within 7 calendar days without the incurrence of any penalty. This ruling was originally slated to come into effect in April 2003 but was delayed till July 2003. The move had been prompted by fears that less informed investors were purchasing structured products under the mistaken belief that they were deposit equivalents.
NEW PRODUCTS: The new products introduced over the past 12 months were:
-- Retail hedge funds
-- No-Expense fund
RETAIL HEDGE FUNDS: Three houses began selling retail hedge funds. All the products offered were fund of hedge funds, not single strategy ones. Under the current regulations, hedge funds with guaranteed/protected structures require no minimum subscription, fund of hedge funds require a S$20,000 minimum and single strategy funds S$100,000.
The four funds introduced had minimum sums ranging from S$5,000 to S$100,000. Two of the four funds were guaranteed. Despite this, the four funds only drew in an estimated S$50m in total. The relatively small sizes have been attributed to the lack of understanding among retail investors about the nature of the products, the main perception being that they were "very risky". Two of the fund managers were foreign, ABN Amro Asset Management and SG Asset Management; one was local, DBS Asset Management.
NO-EXPENSE FUND: A No-Expense fund has been introduced for the first time by a boutique firm, APS Asset Management. All charges including management, trustee and custodian fees will be absorbed by the firm. There is a performance fee of 30%, to be kicked in once annual returns cross the hurdle rate of 6%. The fund invests in Asia ex-Japan equities. The firm has said that it is investing $5m of its own money in the fund in order to assure investors that its own interests are "aligned" with theirs.
The average expense ratio for unit trusts in Singapore is currently about 2.2%. Expense ratios have in general fallen as under current regulations advertising and marketing costs are no longer permitted to be charged to the fund.
CROSS BORDER DISTRIBUTION: There have been no new developments on cross-border distribution. Currently, Singapore-registered funds are distributed only in Taiwan and Brunei.
OTHER COMMENTS AND OUTLOOK FUTURE GROWTH OF THE FUND INDUSTRY: The government has been active in encouraging the development of the financial planning industry. One prime concern is the ageing population of the country. In line with this, there has been progressive liberalisation of the Central Provident Fund (CPF) scheme to allow the population more options in the use of their pension monies for investment. There is an estimated S$92b available for investment, of which only $25b has been actually used.
Alongside the liberalisation there have been also other changes to the scheme. One significant change is in the allocation of assets. The amount available for individual stocks has been reduced to 35% while no limit is placed on approved unit trusts. Unit trusts currently form a relatively low amount (11%) of the investments with the bulk of the invested monies going into insurance (61%) and stocks (28%).
Fine-tuning of Securities and Futures Act (SFA) and Financial Advisors Act (FAA) The authorities are currently in the process of fine-tuning the Securities and Futures Act (SFA) and Financial Advisors Act (FAA). The Amendment bill is expected to be largely technical in nature to clarify and achieve a greater degree of consistency in the Acts. One expected change is the introduction of temporary licenses for individuals acting on behalf of a locally licensed entity for only a limited time. This will make it easier for financial firms to employ specialists for short periods.
COST PRESSURE: The relative small size of many Singapore unit trusts mean that expense ratios can be higher than 3% for some funds. Front-end loads, even after discounts, are typically in the region of 2-3%. There are further charges if the transaction is effected with the CPF pension funds. If the asset class is seeing only single-digit returns for a period, investors are likely to enjoy only marginal gains, if any.
With this cost pressure, performance fees are likely to become more important. Some have even predicted that this may soon be the only sort of fee that some funds will charge and will mean that the manager only earns revenue when their respective funds have positive returns.
Distributors are likely to continue to enjoy the bulk of front-end loads at the expense of the product managers and, in some cases, distributors will also retain high trail fees.
There is recognition by product manufacturers that more cost-effective sources of distribution needs to be developed e.g. through the Internet. Some also foresee an overall drop in front-end loads if returns remain relatively low.
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Statistics as at 30 June 2003
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AUM AUM No of
(in Millions of S$) (in Millions of US$) Funds
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Equity Funds
Pure Equity 6.733.81 3.823.86 256
Equity Fixed Term* 4,437,48 2.519.86 73
Bond Funds
Pure Fixed Income 2.136.43 1.213.19 45
Fixed Income Fixed Term* 214.93 122.05 4
Money Market Funds 228.57 129.80 9
Balanced Funds
Pure Balanced 1.835.58 1.042.35 37
Balanced Fixed Term* 1.041.84 591.62 13
Total 16.628.64 9.442.73 437
*Guaranteed or Protected Funds, Source: S&P Micropal
S$US$1.7610. Source: Bloomberg as at 30 Jun 03
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