The Philippine investment funds industry is lagging that of other Southeast Asian markets, with a low product penetration rate, limited range of funds and product structures not aligned with global standards. Can it expect dramatic improvements now that a new government has been elected?
The general consensus is that it’s too early to say. The presumptive president Rodrigo Duterte has offered little in the way of details on economic policy plans, and has admitted he is no expert in finance and capital markets.
So while he is expected to shake things up in certain areas – witness his controversial plans to crack down on crime – the asset management sector seems unlikely to be an immediate priority.
Still, industry players are hoping for significant improvements under his presidency. They point to several key issues they feel should be addressed: the limited range of permitted funds, the relatively slow speed of product approval, the lack of alignment with international structures and the largely closed architecture of product distributors.
Moreover, there are differences in regulatory requirements for the different forms of investment products (mutual funds and unit trusts), even though they offer the same product features.
Certain changes to the old Investment Company Act, which governs mutual fund business and took effect in 1960, would help matters, but attempts to revise the law have not progressed, said Mike Ferrer, managing director of local fund house ATR Asset Management and former president of the Fund Manager’s Association of the Philippines.
Initiatives to amend the law were made through the Collective Investments Schemes Law (CISL), starting in 2007. The latest bill filed in the Philippine senate was introduced in March 2015. CISL seeks to unify and strengthen the domestic regulations governing mutual funds, unit investment trust funds and variable life insurance.
The setbacks encountered by the proposed CISL include deciding on which body would be the principal regulator, overlap of oversight functions and taxation.
However, there is now greater impetus to achieve a unified set of regulations for collective investment schemes with the impending Asean regional integration, Ferrer said. Industry players hope that with the revised law the industry will be liberalised, allowing for more fund types to be introduced and structures to be more aligned with global standards.
However, local regulators are seen as slow to embrace new investment concepts. For instance, the Philippines only started allowing offshore investments through feeder funds in 2013, whereas Malaysia and Thailand have had similar systems in place for some 10 years.
One Manila-based fund executive welcomed the introduction of feeder funds, but lamented how long it took to happen and is looking forward to further liberalisation. “We’re seeing growth in feeder funds, but there are other products we are hoping can be introduced here, such as funds in the alternative space,” he said.
Funds in the Philippines are mainly plain-vanilla ones – there are no hedge funds, multi-currency share classes or real estate investment trusts (Reits). An exchange-traded funds framework was only put in place in 2012. Reits are allowed, but tax impediments have dissuaded property owners and fund managers from introducing them.
The market offers three types of investment vehicles to retail investors, each of which is regulated by a different body: unit trusts (by the central bank), mutual funds (Securities and Exchange Commission) and variable investment-linked funds (Insurance Commission).
There have relatively few mutual fund launches in the Philippines, as unit trusts are quicker, easier and more cost-efficient to set up. ATR Asset Management, for instance, has not launched a single mutual fund in five years but has set up eight unit trust funds in the same period.
Mutual fund AUM stood at Php243 billion ($5.2 billion) as of end March 2016, while unit investment trust fund (UITF) AUM was Php707 billion as of the same date.
However, regulations for distribution through third-party channels are more favourable for mutual funds since they can tap agents and third-party distributors. But UITFs can only be sold by distributors that are part of the same group as the product manufacturer.
It is expected that many of these issues will be resolved by revisions to the Investment Company Act.
A mutual fund law more aligned to global standards would also facilitate the country’s participation in the regional fund passporting schemes being developed. The Philippines has indicated its intention to join the Asia Region Funds Passport scheme, for instance, but a lot still needs to be done before it can participate, given its current regulatory framework.
Of course, it is not only regulatory change that is needed to boost the penetration rate of mutual funds, but also investor education, noted Ferrer. Moreover, online distribution can help the industry develop, as potential investors are tech-savvy.
If the regulator – with the help of the industry – can address these issues, the Philippine funds business has huge potential given the low take-up so far and the size of the population (around 100 million).