Managed Funds In The RegionOpportunities and ChallengesLuncheon speech by Mr Shane Tregillis, AMD, SFD, MAS, Seventh Asia Oceania Regional Meeting, 10 April 2002
1 I would like to thank IMAS for inviting me to share some of my thoughts on the fund management industry in the region this afternoon. The fund management industry has witnessed major changes in the past decade: no doubt the pace of change and the challenges we all face will only intensify and become more complex over the next few years. This meeting of regional fund management industry associations provides a timely opportunity to review developments over the last few years, and to examine how to continue engendering a dynamic fund management industry in the region in the coming years.
2 There were two distinct periods for the Asian fund management industry in the 1990s. The first half of the decade saw the evolution and growth in the number and types of managed fund products offered in Asian markets, as well as an increase in assets under management. This was largely due to bullish market conditions that attracted many foreign investors and fund managers to Asia, as well as to the increasing investor sophistication and pension fund reforms within Asia. The Asian Crisis in 1997 and the first signs of a slowdown in the global economy ensued, culminating in a not so rosy close to the decade.
3 Despite subdued economic and business conditions in the region, the fund management industry has shown some positive signs in the first years of the new millennium in a number of jurisdictions in the region. Developments in each jurisdiction have been covered in earlier sessions, so I will only briefly mention the figures in Singapore to illustrate my point. In Singapore, total AUM grew slightly (1%) and the number of investment professionals increased by some 10% in 2000. Preliminary returns from our latest survey suggest that the Singapore industry has registered further growth in 2001.
4 Today, prospects for the industry are beginning to look better. The US economy is picking up. Recent financial disasters such as the burst of the technology bubble, September 11 and the high profile collapse of Enron have encouraged investors to diversify beyond Western European and US markets. On a separate note, having already suffered significant devaluations post 1997, Asian markets have rebounded much more quickly and strongly (vis-୶is Western markets) after the recent shocks.
5 In the face of this environment, there are both opportunities and challenges ahead of us. I will speak on several of these.
Direct Entry of Foreign Funds
6 The financial services sector has been a global industry for some time, although mainly at the wholesale transaction level. Until a few years ago this was much less true in relation to personal financial services. In most countries, it was mainly the local players that serviced local markets and customers. This is now changing rapidly due to the same forces of information technology, reduced transactions costs, integration of capital markets, changes in regulation and trade liberalisation driving globalisation elsewhere Source: McKinsey Quarterly 1999, No 2.
7 Consumers and investors increasingly expect to be able to choose the best product irrespective of where it comes from, and the information to enable them to compare products is more readily and cheaply available. Financial firms are also actively looking for new markets to take advantage of economies of scale and to specialise across markets in niche areas of the value chain. It was in recognition of these trends that MAS has been updating its regulatory framework for collective investment schemes (CIS) in the Securities and Futures Act (SFA) and creating a single licensing regime for financial product advice under the Financial Advisers Act (FAA). Other jurisdictions in the region have embarked on similar reform efforts.
8 A key liberalisation measure under the SFA is the removal of previous restrictions preventing the direct offer of foreign funds into Singapore. Such direct offer was restricted by the requirements in the Companies Act for both the offeror and trustee of a unit trust to be a public company incorporated in Singapore and for an approved trust deed for the scheme. This resulted in the prevalence of the feeder fund structure for managed funds in Singapore.
9 The new SFA enables the sale of foreign funds directly in Singapore. A foreign offeror is now allowed to sell its funds in Singapore just like any Singapore fund manager: it only has to establish a minimal legal presence by registering as a branch of a foreign company in Singapore. This is not an onerous requirement but one we regard as being important to ensure investors have legal recourse within Singapore, should the need arise. In addition, the foreign offeror has to register a prospectus with MAS. The foreign prospectus may be used so long as the contents include those required under Singapore law. The new regime for foreign funds in Singapore under the SFA means that Singapore along with other countries in the region such as Hong Kong and Australia all permit the direct offer of foreign funds.
10 The introduction of foreign funds directly in this jurisdiction should reduce costs related to duplication of services such as trustee and custodial services, and involve less cost in adapting to different regulatory requirements. This should mean lower costs for Singaporeans investing in managed funds and a wider choice of investment products being offered.
Maintaining Investors' Trust
11 At its simplest, the managed fund industry involves pooling the sums of individual investors to be professionally managed. It is an industry built on trust where investors must have confidence in those managing their investments on their behalf. Accordingly, while investors must be prepared to accept the investment risks involved in managed funds, they should be able to have confidence in the honesty, competence and professionalism of those to whom they entrust to manage their funds. They should also be able to trust that the promises made in prospectuses and marketing materials are fairly and honestly made, and will be kept. Such trust is hard earned but easily lost.
12 Under the new SFA, MAS will now more actively supervise the trustees of unit trusts in Singapore. We see this as filling a gap that existed in the previous regime rather than a response to any particular problems that have been experienced in the performance by trustees of their responsibilities in this jurisdiction.
13 As I am sure you are all aware, in the trust structure typical of many countries in Asia and Oceania, the trustee is charged with the duty to oversee the rights of investors in a fund. The trustees of unit trusts in Hong Kong are already subject to inspection by the HK SFC. Traditionally, the trust structure relies on the monitoring of the fund manager's management of a fund by an independent trustee.
14 In 1998 Australia moved from this traditional unit trust structure involving separate manager and trustee roles towards the appointment of a single responsible entity. Since the responsible entity takes on responsibility for all aspects of the fund, there is no longer an issue as to the division of functions between the fund manager and trustee.
15 Despite some slight differences in regulatory frameworks in the jurisdictions in the region, they are all designed to achieve the same regulatory outcomes. This is to ensure that investor funds are properly safeguarded, managers act in the interests of investors, and fund managers carry out their duties honestly and professionally.
16 I would like to canvass briefly a few challenges we face both as an industry and as regulators in maintaining the trust of investors essential to the continued growth in the managed funds industry in the region. I have mentioned some regulatory protections and also the role of trustees in the oversight of funds being managed. In Singapore, the introduction of the FAA will serve to regulate the provision of financial advice and promote investor awareness in products such as unit trusts. It is important that our regulatory regime is robust and promotes high standards of professional conduct of intermediaries
17 At the same time, we need to do more to ensure that investors themselves can look after their own interests by better understanding the nature of managed funds generally, and also the risks and benefits involved in specific products. The issue is especially pertinent in the region, where managed funds are relatively new and a proper understanding of personal investments is at an early stage.
18 I consider that it is in the self-interest of firms and the industry through its associations to take a more active role in educating investors about the nature of managed investments, their role as part of an investment and wealth management strategy, and the advantages and disadvantages of different products depending on an investor's individual investment or risk profile. This is particularly so given that flat returns over the last months from many funds may have caused some new investors expecting quick, high returns to lose confidence in the managed funds sector. It is a general rule that savvier investors make for happier and more interested investors, as well as happier regulators. The managed funds market cannot acquire depth without investors better understanding the role of managed funds generally and the characteristics of different products.
Innovations within the industry
19 Which brings me to two other issues. How we as regulators are responding to innovation and the importance of clear, complete and comprehensible disclosure to investors.
20 At MAS, in the past year we have seen some innovative managed fund products. These have included funds that use option strategies, repurchase agreements and other forms of structured products. Managers have also begun to look to investments in exchange traded funds (ETFs) and other cost-efficient vehicles to achieve diversification. There has also been much interest in hedge funds and MAS issued guidelines for the offer of such funds to the public in June last year. In terms of investment strategy, we have seen attempts to fuse the benefits of active and passive management, for example, actively selecting a basket of equities that will then be passively held over a one-year period.
21 In the area of client servicing, efforts have been made by some managers to establish different 'classes' within a fund to allow investors the option of choosing how distribution costs are paid. Also, to encourage dollar cost averaging, some regular savings plans offer discounted loads to investors who continue investing for a minimum period of time.
22 The key challenge for us as regulators has been to adapt our regulatory framework to accommodate these new products and ideas. With the move away from traditional investments in bonds and equities, we have spent much time trying to make sure we properly understand these new products.
23 Apart from innovation on the product and investment side of the fund, there has been some quite aggressive competition within the industry in Singapore in the area of marketing and promotion. This has ranged from extensive advertising campaigns to offering 'incentives' (and not just your usual extra units or more attractive deposit rates, but a free life-insurance component as well) to tie-ups with property developers who offer units in selected schemes to early birds at their property launches.
24 We have responded in several ways. PD 11, which I'm sure all local managers are familiar with, will prohibit marketing and promotion costs (currently not disclosed upfront to investors) from being charged to the fund in July. This is consistent with the position in Hong Kong, UK and US and we believe ensures that these marketing costs are transparent to investors.
25 Moving forward, in line with our goal of having a disclosure-based regime, we consider the industry should be placing greater emphasis on three 'C's. Disclosure pertaining to a fund should be clear, complete and comprehensible. Clarity and completeness should apply to all forms of disclosure including brochures and newspaper advertisements and not just be confined to prospectuses of funds. The information disclosed should also be comprehensible to the average investor. Disclosure of risks using highly technical terms to describe some of the embedded option strategies, for example, is of little use to the average person when contemplating an investment in a fund.
26 If investors are not to be unpleasantly surprised by the investment outcomes of their investments, fund managers and distributors should disclose and explain the features and risks of products in ways that customers can readily understand. This is at the heart of being able to move away from a more protective regime where the regulator makes judgments on what products are available in a disclosure based regime where investment choices are left very much to the individual investor.
Blurring across product lines
27 In closing, I'd like to leave you with some thoughts from a more macro perspective. This conference has been organised to provide a forum where expertise and experience on fund issues may be shared. At the same time, it is important that we also consider the implications of the emergence of alternative vehicles that could offer to the public both investment expertise and diversification, two key benefits from investing in a managed fund. Locally, banks have begun to introduce discretionary managed accounts targeting mass affluent investors. Investment-linked policies (ILPs) offered by insurance companies are also gaining popularity.
28 On another note, if the activity in developed markets is a glimpse of what is to come, then there is also merit in considering the potential implications of note structures incorporating variable returns that, for example, are linked to hedge fund strategies and actively managed ETFs.
29 From both a business and regulatory perspective, our willingness to adapt and leverage on new opportunities is critical in a changing environment. While we have undoubtedly progressed, I encourage you to continue being active in educating investors, in broadening and deepening the market, in working together with your regulators, and in meeting the challenges that lie ahead.
30 The next few years are critical to the development of the region's fund management industry. While MAS and other regulators in the region will continue to play an important role in promoting investor confidence in the industry and assisting development initiatives, the future growth of the industry in the region very much depends on industry players like yourselves seizing opportunities presented by the improving market conditions and your efforts in winning and maintaining the trust of investors.
31 I wish you a fruitful time at your discussions. Thank you.