Here we continue our series of articles looking at the development of Asia’s asset management industry and its future prospects, as part of AsianInvestor’s 15th anniversary celebrations.
Today we examine Singapore, and how the success of the Lion City’s investment sector belies a weak domestic business for mutual funds. The full article can be read in the May 2015 edition of AsianInvestor magazine.
Singapore’s weak domestic business for mutual funds can be seen as a result of 15 years of boom, bust and scandal.
While much of its financial services industry has thrived, the funds business has suffered from fickle investors lured away by short-term equity gains, property price profits and the safety net of the state pension system.
Tighter rules have also made sales harder, but potential can be seen in the thriving offshore funds industry, driven by demand from the private banking sector.
Singapore’s continued success as a city-state has been built on its transformation from manufacturing to services hub.
The $300 billion economy has a higher per-capita income than the US. There are more than 120 foreign banks resident. The wealth management industry is booming.
Yet the development of the domestic mutual fund industry has not all been plain sailing; idiosyncrasies persist.
The first domestic funds were launched in the mid-1990s, finding favour with the middle class. Rising stock markets were then turbo-charged by the tech boom. Foreign fund managers duly touched down in the Lion City.
On the distribution side, Standard Chartered broke the mould by shedding its fund management arm and introducing open architecture. The local banks took note and, to the chagrin of their own asset management arms, started to distribute third-party funds too.
Helping momentum was the Central Provident Fund (CPF), the mandatory contributory pension scheme, which increased allowances that individuals could assign to approved funds.
In hindsight, the tech boom was a high point. Predictions made then for 10-15% annual compound growth for the industry turned out to be optimistic.
No one is complaining today, and the overall industry is much larger. But the growth has come disproportionately in offshore or cross-border funds. That market is worth around $35 billion today, versus $25 billion for domestic sales.
While the penetration rate for domestic funds has nudged up from 3-4% in 1999 to 12-15% today, in the US it is 50-60%.
Poor domestic sales can be blamed on several events. For one, a series of external crises derailed the development of a popular equity culture. Aside from the collapse of tech stocks, the Severe Acute Respiratory Syndrome (Sars) epidemic in 2002-03 was a blow. Then came the 2008 crisis and the scandal of structured products. The latter were typically sold not as risk (i.e. investment) products, but as enhanced savings products. The fallout was to scare off the marginal buyers who ought to form the industry’s future base.
Another reason is behavioural. There is a tendency among Singaporeans to take a barbell approach to finances. The wealthy like their money to work fast. Hence, equities are preferred to bonds, with funds chosen as proxies for whatever happens to be going up at the time ... commodities, single-country funds, real estate. This tends not to be sticky money.
For safety, on the other hand, investors of all stripes look no further than the CPF savings account - or property.
For the past decade, what is notionally a utility purchase – a roof over one’s head – has been a good buy, too. Property prices have skyrocketed. Loose US monetary policy in the form of QE has added fuel to the fire, but that is not the only reason why Singapore is now the most expensive city on Earth. Property buying is, after all, subsidised.
This competition apart, the authorities were already keen to liberalise the funds market. In the early 2000s, the first financial advisers were licensed. Many came from insurers. Online platforms helped the best ones to flourish. The biggest, iFast, now has $5 billion in assets.
More competition, among both intermediaries and fund managers, has put pressure on fees. With luck you should not expect to pay a front-end fee when buying a fund today. The choice of funds is greater than ever – 500 or more – thanks partly to the ease with which foreign fund managers can set up in Singapore.
New rules on customer due diligence and anti-money laundering, meanwhile, have made selling funds much harder. Given that funds are proverbially sold and not bought, that may be a good thing. But the paperwork is off-putting.
The offshore industry has been more vibrant. Demand for funds has risen with the growth of private banking. Approaches differ, however. While some banks see funds as part of a move into holistic wealth management, the discretionary management business has yet to take off. For advisory-driven banks, funds tend to be less popular.
On the whole, Singapore has done well for retail fund managers, despite its small market. But fund management was never the jewel in the state’s financial services crown, more a supporting bauble.
Nick Hadow is chairman of the Investment Management Association of Singapore