CPF funds allowed offshore access

SingaporeƆs move to protect retail investors also benefits the mutual fund industry.

Singapore's Central Provident Fund has decided to allow members to invest CPF money in foreign currency-denominated mutual funds. The move will reduce costs for consumers and provide a modest fillip to fund management companies already operating a retail business in the Lion City.

Until now, CPF monies from CPF ordinary accounts and CPF special accounts have been allowed to invest only in Singapore dollar-denominated investment instruments. That meant global fund managers wishing to sell a foreign-listed unit trust locally had to do so through a feeder fund structure, which adds costs that are passed on to the customer.

Last year the cash market for unit trusts was allowed to invest in offshore funds directly. But the cash market is smaller than the CPF market for unit trusts, so most global houses have been waiting for access to CPF money before believing this represented a significant opportunity.

As of end 2001 the total unit trust market was S$11.7 billion ($6.6 billion) of which S$7.5 billion, or 64%, came from CPF investors.

So allowing CPF money into offshore products directly will reduce costs for investors by bypassing the necessity for feeder funds, says Peter Douglas, director of GFIA, a consultancy.

"It's a positive move," says Edmund Lacis, senior vice president and head of Asian sales and distribution at Pioneer Investments in Hong Kong, "although it doesn't make Singapore into the retail growth opportunity of Taiwan."

Singapore, recognizing it is slipping in prominence as North Asian opportunities grow, has lately been straightening up its fund management industry. A high-level Economic Review Committee has just published recommendations to boost Singapore's role as a wealth management centre, as reported yesterday on FinanceAsia.

Lindsay Mann, CEO at First State Investments in Singapore, says onerous requirements for foreign currency-denominated funds had kept global houses from bothering with the cash market, but that opening CPF money is now making everyone reconsider.

Industry players say, however, that while this latest move will help existing fund managers, they don't see it expanding the retail market radically.

Douglas says, "Distribution at the retail level is the same, which means it's dominated by a handful of major banks which will continue to sell what is easiest - products that people know. It's still based on marketing. Existing players can bring in a new product, but this change won't create an opportunity for fund houses that don't already have a retail presence."

The new regulations make clear that only fund management firms with a track record in Singapore will be able to sell unit trusts to CPF account holders.

According to Mann, the new rules' main hurdle is that any corporate-type fund, as most Dublin-listed funds are, must maintain a branch office in Singapore and name an individual responsible for its behaviour. (Contract-type unit trusts only need to have a fund manager based in Singapore.) This means the incorporated mutual fund must subscribe to Singaporean rules for companies such as branch reporting and compliance. He expects few fund companies will bother to import corporate-type funds to Singapore under these circumstances.

Although Singapore is not unique in requiring this, most Asian jurisdictions including Hong Kong do not.

Douglas says now "The retail landscape is where it needs to be," but adds there remains another regulatory kink. Because CPF investments are held within a CPF member's account, distributors are not able to provide investors with advice (or at least they cannot charge a fee for it). Therefore, a divide exists in terms of quality advice going to cash investors and CPF investors.

Douglas says authorities are now discussing this. The ERC's recommendations this week also called for CPF life-style funds, which could also address this point.

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