"Fund Management in Singapore : New Directions"
Speech By Deputy Prime Minister Lee Hsien Loong, at The Investment Management Association of Singapore Seminar
Date: 26 Feb 1998
1 I am happy to address this seminar jointly hosted by the Investment Management Association of Singa-pore and the Stock Exchange of Singapore. This is the first major public event organised by IMAS. It takes place at a significant moment, both externally and domestically. The region is facing its most serious economic crisis since the 1960s. In Singa-pore we are reviewing our policies and strategies towards the financial sector, to make Singapore a key financial centre in an increasingly dynamic and competitive global environment.
2 Over the last few months, MAS has worked intensively with industry players and other government agencies to review the regulatory framework and formulate strategies to develop specific industries within the financial services sector. Last week, the Government responded to Mr Peter Seah's Finance and Banking Sub-Committee Report. We accepted nearly all the recommendations, other than those involving tax issues.
3 This is only part of our review of the financial sector. In parallel with the Finance and Banking Sub-Committee, MAS had set up a group led by Mr Tharman Shanmuga-ratnam to study in detail the fund management industry. The group has drawn on the views of the Finance and Banking Subcom-mittee, IMAS and numerous fund managers. The group has proposed a set of strategies for developing the industry, which MAS has accepted. I shall outline the key strategies today. But first let me touch on the regional economic crisis and its implications for our financial sector.
IMPLICATION OF THE REGIONAL CRISIS
4 The financial turmoil in Asia has yet to run its course, but some lessons are already clear. The crisis confirms the importance of our long-standing fundamentals. But it also points to potential risks that we have to manage as we further liberalise and open our system to more competition and external influence.
5 We must continue to maintain macroeconomic stability. This means pursuing sound fiscal and monetary policies, spending prudently within our means, and keeping inflation low. But this crisis has shown that macro-economic stability alone is not quite enough. The Asian countries' fiscal positions were on average much better than the OECD economies. Inflation rates were mostly as good as or only slightly higher than the OECD average. Yet a crisis was precipitated.
6 The problem was not so much wrong macroeconomic policy as structural and institutional weaknesses. These weaknesses caused resources to be misallocated to unproductive purposes. Fixed exchange rates and easy access to foreign capital encouraged financial institutions to borrow foreign funds at low interest rates, and expand domestic credit excessively. When economic conditions turned, borrowers could not repay, credit quality deteriorated, and domestic banking and financial institutions were severely weakened. Tighter regulation and supervision of the financial sector might have pre-empted this breakdown of the financial inter-mediation process.
7 In Singapore rigorous regulation has helped to prevent excessive credit growth and risk concentrations, and the build-up of large unsustain-able positions that could endanger the whole financial system. The strong capitalisation of our financial institutions has been a valuable buffer, helping them to absorb problems in their loans and investments to the region.
8 Liberalisation does not mean lowering supervisory standards. Indeed, as we review our regulations to allow market players greater room to innovate and take risks, we must strengthen our supervisory system further. Regular on-site examination of financial institutions will become an important part of our supervisory framework.
9 The crisis has also shown the risks involved when countries and companies raise funds from global financial markets. Financial institutions need to constantly review and update their internal risk control mechanisms, to keep up with changes in external conditions and business strategies. Countries need to build better systems to assess and manage these risks. Governments should track foreign borrowing by financial institutions and companies, and assess how vulnerable they are to changes in external factors under various scenarios.
10 . Disclosure standards of countries, financial institutions, and companies must all be raised. Lack of transparency about the operations and exposure of financial institutions was a major factor which first allowed a dangerous situation to develop, and then aggravated the crisis of confidence when problems emerged. Investors who do not know enough fear the worst. The result is herd behaviour and market over-reaction.
11 Nevertheless, all these precautions cannot guarantee that a similar economic crisis will not recur sometime in the future. Manias, panics and crashes are intrinsic to financial markets. But the precautions will make a recurrence less likely, and perhaps if it does happen again make it less disastrous.
12 The ongoing crisis should not cause us to slow down our reform and developmental efforts. Rather, we must take this opportunity to build on our strengths to further enhance our role as a financial centre. We should look beyond the current problems, and prepare ourselves now so that we can prosper together with the region again when it recovers.
LONGER TERM PROSPECTS
13 Fund management is one activity with good potential when the region picks up again. We do not expect quick results in the current climate. Fund managers and investors have reduced their Asian exposures and are not in a hurry to build them up again. A few are cutting back on staffing. The total volume of Asian fund mandates has declined since the middle of last year, and may well shrink further. But the longer-term trends give cause for optimism.
14 First, global demand for fund management services will increase significantly over the next 20 years. Working adults in the US, Europe, and Japan are increasingly investing their retirement savings in professionally managed funds that are more diversified globally and offer higher risk-adjusted returns than traditional investments1.
15 Second, East Asia has strong potential once again to grow faster than the developed countries when it gets back on its feet. The high savings rates, the drive for education, the dynamism sparked off by China's economic reforms, will continue. Growth will once again create attractive investment opportunities. Mutual funds and institutions in the US and Europe will want Asian assets in their portfolios, even if they invest more judiciously than before.
16 Third, American and European fund management companies are locating their investment teams across the globe, to be nearer to the markets they invest in and to interact more actively with their clients. Asian clients want direct access to investment managers based in Asia. Our time zone offers scope for at least two major fund management centres.
17 Singapore started actively promoting fund management in the early 1990s. Since then the industry has grown strongly2. But still it manages only a small fraction of the funds sourced from Asia or invested in Asia. Only 10 fund management companies here manage more than S$3 billion. We need to attract more internationally reputable fund manage-ment companies to establish here. We will encourage those already here to expand their operations. We will also provide room for indigenous fund managers, including boutique firms, to grow.
18 Our vision is to develop Singapore into the premier fund management hub in Asia over the next 5-10 years. We start with well known advantages: our reputation as a safe haven, our record of political stability and macro-economic sound-ness, our well-established air-links, tele-communi-cations network, and IT infrastructure. But we also face some natural constraints: a small domestic market, and distance from the major invest-ment markets of America and Europe.
19 Our target is therefore twofold. First, to become a centre for managing the Asian investment portfolios of both Asian and Western clients. And second, to manage global investments of clients in Asia. The industry is already developing in this direction3.
20 Regulatory, institu-tional, and policy weaknesses have held us back from realising our full potential. Our strategies for developing the fund manage-ment industry focus on these areas.
21 First, we will improve and streamline the regulatory structure for fund managers and unit trusts. Fund management companies are exposed to lower risks than securities companies, and therefore generally need less capital. But our financial criteria for obtaining an Investment Adviser's (IA) license are set too high. This has kept smaller but well-managed fund management companies of good repute out of Singapore.
22 We can relax the financial requirements to qualify for an IA licence without compromising prudential standards. MAS will reduce the minimum shareholders' funds required for an IA licence from S$500 million to S$100 million. It will also lower the minimum amount of global funds that the parent company must manage from S$5 billion to S$1 billion. However, the admission criteria in terms of track record, manage-ment expertise, and licensing status will remain.
23 Firms that fall below the threshold, but whose managements have established a strong track record and shown that they can contribute to the development of the industry in Singapore, will also be considered for IA licences by the MAS. This is especially to help some of our indige-nous boutique firms to grow. In time a few may develop into larger players. Perhaps not on the scale of Alliance Capital, Templeton, Fidelity or Warren Buffet's Berkshire Hathaway, but those too all started off as small firms. We should support talented fund managers who venture forth to startup on their own, and not subject them to onerous conditions.
24 At the same time, we must strengthen supervision of the fund management industry. We need to verify that IAs comply with securities regulations and disclose their activities to investors fully and accurately. MAS already has the authority to inspect IAs. But hitherto it has concen-trated on inspecting banks rather than IAs because of lack of manpower. MAS will undertake on-site inspection of IAs, and build up its inspection capabilities to cope with the additional workload.
25 For unit trusts, we will make our regulatory require-ments and approval procedures more transparent. For instance, guidelines for trust deeds and prospectuses are currently issued as administrative require-ments. We will give legal effect to these require-ments by amending the relevant sections of the Companies Act and Companies Regulations.
26 Currently, the Registry of Companies and Businesses approves unit trusts, with MAS giving its input on policy matters. Yet fund managers deal only with RCB, and not MAS. If the issue is not legal or procedural but arises from MAS' policy requirements, RCB has to refer it back to MAS. The industry is not aware of these arrangements. This has caused some confusion and delayed the processing of applications.
27 We will make MAS' role in reviewing trust deeds and prospectuses more transparent. Documents will be sent simultaneously to MAS and the Registry of Companies and Businesses. MAS will discuss any queries it has directly with fund managers and their lawyers. RCB will continue to approve unit trusts under the Companies Act, but eventually we will transfer the statutory responsibility for regulating unit trusts to MAS, so that the agency setting the policy is also charged with implementing it.
28 It currently takes 2-3 months to process applications to launch unit trusts. The industry has told us that Hong Kong is much faster. Through these measures, we aim to cut down the processing time to 4-6 weeks, as recommended by the Finance and Banking Sub-Committee.
29 We will also free up the current restrictions on regular savings plans (RSPs). RSPs are an optional feature in some unit trusts. The subscriber commits a certain capital sum which is paid in monthly instal-ments. Currently, we require the monthly contributions and total ongoing invest-ment in RSPs to exceed a certain minimum figure. By removing these limits, we will level the playing field for lower-income investors and further promote the fund management industry.
Place out more GIC Funds
30 Next, GIC will place substantially more funds with private fund mana-gers based in Singapore. Ultimately, the growth of our fund management industry depends on over-seas funds. But having a sizeable core of domestic funds to manage will help attract major international fund manage-ment companies to make Singapore their regional centre. The domestic funds will provide these companies an initial source of business and encourage them to invest in infrastructure, build up their teams, and expand.
31 Since 1994, GIC has been placing out more funds to private fund managers with offices in Singapore. So far, it has placed out a total of S$10 billion. GIC has reviewed the progress. It has made a policy decision to step up the pace significantly, and place out a larger proportion of its funds to external fund managers.
32 Specifically, GIC aims to farm out up to 50% of its Asian portfolios to private fund managers. Almost all of this will be placed with fund managers who have Singapore offices. The extent to which GIC's target is met will depend on how well these fund managers perform and how much they contribute to the development of the industry here.
33 In the next 3 years, GIC will increase the amount placed out to fund managers with Singapore offices from S$10 billion to S$35 billion. This will comprise both global and regional mandates. Not all of this need be managed from their Singapore offices. But we would expect fund managers receiving GIC mandates to bring in additional funds to Singapore for management, to meet MAS' development objectives. They should bring in talent to Singapore, as well as build up their team of Singaporean fund managers. Those receiving global mandates should involve their Singapore-based managers in the global investment process, and give them responsibility for the Asian investment portfolio.
34 The total volume of funds managed out of Singapore will probably not expand much over the next year or two. But the incentive of additional funds from GIC should encourage firms to shift funds to Singapore and moderate any downturn.
Liberalise the CPF Unit Trust Scheme
35 Our third strategy is to further liberalise the CPF Unit Trust Scheme, and encourage CPF members to invest in profes-sionally managed funds. This will increase the pool of domestic funds available for professional management.
36 In October 1994, the Senior Minister announced a set of measures to promote the fund management industry and allow CPF members to invest their savings in CPF-approved unit trusts. But the response from CPF members has been modest. They have so far invested only S$400 million in CPF-approved unit trusts and discretionary fund manage-ment accounts. This is despite successive relaxation of the rules for CPF-approved unit trusts, most recently in January.
37 One reason the scheme has not been popular is that Singaporeans prefer to punt individual stocks on their own, rather than entrust their money to professional managers. Unfortunately the record shows that few individual punters make money. This is a process of education, as people learn by experience and gradually become older and wiser. The industry should mount programmes to encourage CPF account holders to use professional managers to diversify risk rather than invest in individual stocks themselves.
38 Another reason is that CPF-approved unit trusts have generally not performed well. In fact, on average they have done worse than non-CPF unit trusts. Fund managers have told us that one reason is that the CPF investment limits for fund managers are too restrictive, and prevent them from diversifying their portfolios properly to maximise risk adjusted returns. This is probably also why few fund managers have applied to set up CPF-approved unit trusts.
39 We have reviewed the CPF Unit Trust Scheme with the help of the industry. We will modify it as follows:
|a.||First, we will widen the selection of CPF-approved fund managers, so as to offer CPF investors more choice.|
|b.||Second, we will rewrite the investment guidelines for CPF unit trusts, to give fund managers the flexibility they need to diversify their portfolios. We will remove the current caps on asset types and foreign investments, restrictions on the universe of permitted foreign markets and strict liquidity requirements. Instead we will require CPF unit trusts to diversify their portfolios in order to reduce portfolio risk. We will allow them to invest in a wider range of assets, excluding only risky instruments like unlisted shares.|
|c.||Third, we will raise disclosure standards so that CPF investors can compare the performance and charges of different unit trusts and fund managers, and make informed decisions.|
We are now finalising the changes and will announce the revised CPF Unit Trust rules within 2 months.
Enhance Distribution Channels
40 Our fourth initiative is to enhance distribution channels for unit trusts. The network for marketing and distributing unit trusts and fund management products in Singapore is inadequate. The extensive branch and ATM networks of local banks and POSBank are not being fully exploited to benefit investors or the fund management industry. Foreign fund managers based in Singapore have found it particularly difficult and expensive to distribute their unit trusts.
41 Improving distribution channels will give investors a wider choice of unit trusts. It will promote competition among financial institutions, and drive fees lower. MAS will therefore permit foreign fund managers in Singapore to market their products to Singapore investors through local financial institu-tions, including POSBank.
42 In the US, banks use their branch networks to distribute a wide range of third-party funds. Our banks should view asset manage-ment and distri-bution as separate businesses, and treat client servicing and the marketing of third-party funds as a source of revenue in its own right. Some banks are already starting to do this.
43 MAS will evaluate the foreign fund manager's contribution to Singapore's financial sector, and whether it is adequately regulated by its home supervisory authority, in deciding whether to allow it to sell its products through the local banks. But it is up to each local bank to decide what unit trust it wants to distribute, and whether to recommend a unit trust to its customers. And of course it is up to individual investors to decide for them-selves, given full information, whether to buy a unit trust.
44 We also need to develop a class of independent investment consultants in Singapore to service institutional clients, both local and overseas. They will add depth and professionalism to the fund manage-ment industry. In the US and UK, most institutional investors have independent consultants to advise them on how to allocate their assets, which fund managers to place their money with, and how to measure and evaluate performance. In so doing they provide a channel for fund managers to market their services. Some of the consultants manage a fund of funds, which provides an additional vehicle for corporate clients to diversify their investments.
45 Retail customers in the UK and Hong Kong are also advised by independent advisors on which unit trusts to purchase. We should develop this sub-industry so as to serve the investing public better and reduce marketing and distribution costs for unit trust managers. Our stockbrokers are beginning to play a role in distribution of unit trusts. They can be among the key players in this regard.
Develop Equity and Bond Markets
46 A fifth area of focus is to develop a broad range of domestic investible instruments. Fund management companies seek financial centres that have deep and broad capital markets offering a wide array of instruments. We are currently studying ways to develop our equity and debt capital markets so as to make Singapore the leading corporate funding centre in the region.
47 In equity markets, we will continue to promote the listing and trading of international securities in Singapore, especially regional securities. We need to attract foreign listings, because Singapore's small base limits the growth potential of domestic listings. MAS is reviewing the rules governing the listing of foreign companies on SES. The SES Review Committee and the Corporate Finance Committee are also studying these issues.
48 In bond markets, the longest maturity Singapore Government Bond is now 7 years. MAS will issue a 10-year Singapore Government Bond, to further develop the long end of our benchmark yield curve. Statutory boards will issue bonds to finance infrastructure projects, particularly statutory boards with major infrastructural responsibilities like LTA and JTC. We are also considering measures to promote secondary market trading.
Foster A Strong Private Sector Role
49 Finally, we encourage a strong private sector role in promoting the fund management industry. IMAS is well placed to do this. Our study of the industry has benefited from valuable inputs from IMAS members. IMAS should continue to be an effective channel for such feed-back, raising the industry's concerns to us and suggesting ways to improve the regulatory or fiscal environment.
50 IMAS can play a central role in helping to raise professional standards among fund managers. It should formulate an industry Code of Ethics that matches the best practice internationally. This will set the standard of ethical conduct in areas like compliance arrange-ments, fiduciary duties, and disclosure of conflict of interest to clients.
51 IMAS and MAS can work closely together to design and run training programmes to produce a steady stream of high quality profes-sionals for the industry. Fund management is a people business highly dependent on knowledge, skills and experience. The industry has often complained of the shortage of skilled local professionals, which forces them to import expen-sive foreign talent, pushing up operating costs. While we must continue to attract foreign talent who provide valuable specialist knowledge and expertise, we should also do more to groom promising local talent.
52 IMAS can also help to educate the public. It can organise invest-ment fairs and seminars to educate the man in the street about the merits of collective, professionally managed invest-ment schemes. It can also collate data on investor preferences, which will help fund managers to tailor their products. Where possible, IMAS should pool resources with the SES to avoid duplication.
Use Tax Incentives
53 One strategy that I have not touched upon is to use tax incentives to promote fund management. This is not an oversight. We are studying the matter. We already have various tax incentives for this purpose, but they can be further improved and enhanced. When we decide on any changes, we will announce them.
54. These initiatives to promote the fund management industry are designed to bear fruit over the next 5-10 years. We must not underestimate the current difficulties in the region. But the region will recover, and long-term investors will come back. And when they do, we will be well positioned to ride the next wave.
1 According to some estimates, US pension and mutual funds will invest more than US$2 trillion outside the US over the next ten years. The deregulation of the Japanese corporate pension fund industry could release an additional US$100 billion over the next few years.
3 In 1990, funds sourced from American and European investors accounted for less than 13% of total funds under management. By 1997, this had grown to almost half. At the same time, the importance of America and Europe as a destination for funds managed here has declined relative to the ASEAN countries. In 1990, 29% of total funds managed were invested in the US and Europe, while the ASEAN economies accounted for less than 6%. By 1997, US and Europe bonds and equities accounted for only 11%, while ASEAN bonds and equities had grown to 21%. This clearly reflects Singapore's growing role as a base for investing funds sourced from America and Europe in the Asian region.