Published in Asia Asset Management September 2007
Several funds have been removed from Singapore’s Central Provident Fund Investment Scheme (CPFIS) following the board’s July 1 deadline for all funds in the scheme to meet a sales charge limit of 3%.
Industry observers expect that more funds will be delisted from the CPFIS in the run-up to January 1 next year, which is the deadline for funds to cap their expense ratios at between 0.65% and 1.95%, depending on their risk category. The board’s new fee limits, imposed last December, are meant to help CPF members build up their retirement nest eggs faster by protecting investment returns.
“We knew that this would happen from the very beginning because not all the funds will be able to meet the new criteria,” said Giri Mudeliar, executive director at the Investment Management Association of Singapore (IMAS), a representative body of investment managers, set up in 1997, to spearhead the development and growth of the fund management industry in the republic.
“If fund managers know they can’t meet the criteria, they will not go for CPFIS consideration and will concentrate on the cash market instead,” added Mr Mudeliar. “The cash market will be able to handle front-end loads better. They are not limited by the 3% upfront fee and distributors can carry on with what they are doing.”
According to the Monetary Authority of Singapore’s 2006 Asset Management Industry survey, the country’s collective investment scheme (CIS) market grew to S$30 billion last year. As at end June, the amount invested in the CPFIS stands at a modest S$5 billion.
Still, it is expected that over time the front end loads charged in the non-CPF market will also move closer to the 3% mark from the 5% point where most of them now hover. “People will ask why they should pay more. But in the short run, fund managers will put more effort into the cash market,” predicted Michael Lim, associate director at IMAS.
Among the funds that have been removed from the CPFIS are the First State Global Property fund, the HSBC Asian Growth fund, the HSBC Global Growth fund, the HSBC Pan European Growth fund, the Lion Capital Korea fund, the Lion Capital Taiwan fund, the PRU Japan Smaller Companies fund, the Schroder Japanese Equity fund, the SGAM Asian Real Estate Dividend fund, the UOB United Japan Growth fund, the UOB United European Equity fund, the AllianzGI Asia Tiger fund and the AllianzGI Global Internet fund.
Allianz decided to take both its Asia Tiger and Global Internet funds out of the CPFIS because it knew that the funds would not be able to meet the fee cap criteria. “It was in the best interest of the unitholders because structurally the funds cannot meet the 1.95% expense ratio limit,” explained Kwok Keng Han, deputy CEO at Allianz Global Investors Singapore. “The uptake on both these funds has not been that great.”
The AllianzGI Internet Global fund has a total fund size, inclusive of both the cash and CPF markets, of around S$12 million while the AllianzGI Asia Tiger has a total fund size of only S$3 million and an expense ratio of 2.5%.
Prudential’s PRU Japan Smaller Companies fund was removed from the CPFIS after an automatic reevaluation following a change of management. “We accepted the fact that it is a niche fund and not suitable for the CPFIS. This fund just did not grow in size and managing the total expense ratio became difficult for us,” explained Suraj Mishra, CEO of Prudential Asset Management Singapore.
First State submitted its Global Property fund, which invests in a broad selection of REITs and/or companies that own, develop or manage properties around the world, for re-evaluation last November following the departure of its investment team earlier last year. Upon completion of the review earlier this year, it was told by the CPF that the fund had not met the criteria for continued inclusion under the CPFIS.
Although the Allianz, Prudential and First State funds that are removed from the CPFIS will no longer accept new CPF monies, existing investors will have the option of either leaving their investments in the fund or switching to another of the companies’ CPFIS fund at no cost to them. “There is no material impact for existing investors. The investment strategy of the fund remains unchanged,” said Lindsay Mann, regional head Asia at First State Investments.
Fund managers now have barely three months to ensure that the expense ratios of their CPFIS funds are within the new CPF fee cap guidelines, and many more funds are expected to be pulled out of the CPFIS over the next few months as the January 1 deadline for the expense ratio cap looms.
“There are some (more) funds that are likely to be considered for removal from the CPFIS,” revealed Mr Mann. “However, our evaluation is still ongoing at this point and no final decision has been reached.”
“There will definitely be quite a bit of attrition. If we take the median expense ratio, about 40-45% of the funds will not qualify right now,” commented IMAS’ Mr Lim. “Fund managers have not given any indication as to whether they are working hard to get the expense ratios down,” he continued.
Prudential took a stand in October last year that it would voluntarily fall in line with the CPF mandated fee cap rules. “If ever a fund has an expense ratio higher than the cap we will bear the cost,” declared Mr Mishra.
Some funds, such as feeder funds however, may find it impossible to comply with the new mandated expense ratios. “With feeder funds, there are global fixed costs and fund managers need to set their margins over these fixed costs,” observed Mr Lim.
In the case of Allianz, for example, it has said that it would continue to offer funds, like its Global High Payout fund, that are more suited to the needs of long-term investors. “We are looking at a long term value proposition for CPF investors. They need more diversification, less volatility and more conservatism,” explained Mr Kwok. “There are many ways to invest in global equities. You don’t have to take the growth approach. Slow and steady wins the race.
“The expense ratio aspect will really get people to focus on pension needs. This move by the CPF is good for the industry and good for the members. Fund managers will be more disciplined in terms of looking at fund size,” he added.
With another S$80 billion of CPF money available for investment in the CPFIS, some industry watchers believe that there will not be a lack of fund managers who will be waiting to fill in the vacancies created by those who leave. “From a business point of view, there is an opportunity there. You can’t deny that,” observed Mr Mudeliar.
However, there are new concerns that the potential cash pool for CPFIS investments for which many fund managers have worked long and hard, may shrink with last month’s National Day announcement by Prime Minister Lee Hsien Loong that the first S$60,000 of a member’s CPF balance will earn higher interest and will no longer be allowed to be withdrawn for investments.
In his speech, PM Lee said that the first S$20,000 of a member’s ordinary account funds will earn an additional 1% interest, bringing the interest rate up to 3.5%. The rate for the special, medisave and retirement accounts, up to a total of S$60,000 in all CPF accounts combined, will be pegged to an appropriate long term bond rate, yet to be determined at press time. The rate for these three accounts currently stand at 4%.
Fund managers will now have to deliver a return that is in excess of the new risk-free interest rates in order to discourage CPF members from redeeming existing investments so that they can top up their accounts to S$60,000.
“These changes will inevitably reduce the number of opportunities to use CPFIS and consequently this sector will become less attractive to investment managers,” pointed out Jon Robinson, managing director of Vanguard Investments Singapore.
“In the past, changes to the CPF, in particular the CPFIS, appeared to be tactical reactions to current concerns. The recently-announced changes seem to be much more consistent with the strategic imperative for the CPF to meet social needs,” Mr Robinson added.