by millionairemind » Thu Sep 23, 2010 7:42 am
Published September 23, 2010
Funds find CPF bar too high, time too short
With January deadline looming, most face prospect of losing access to new CPF money
By GENEVIEVE CUA
(SINGAPORE) With just three months to go before their moment of reckoning, less than half the funds here fully meet all the admission criteria for the CPF Investment Scheme (CPFIS). For the rest, the clock is ticking as they face the prospect of not being able to access new CPF money.
By Jan 1, 2011, funds on the CPFIS menu must comply with all four criteria that were put in place in 2006 for all new funds as part of the Central Provident Fund's efforts to improve returns for members by raising the quality of funds in the menu and putting a cap on costs. For funds already in the scheme, the criteria were implemented in stages since then.
Meanwhile, for the funds, consolidation is well under way. In 2006, there were over 400 unit trusts and ILPs (investment- linked insurance funds) on the menu. As at Aug 4 this year - the latest available data from CPF - there are 332 funds. Of these, less than half (about 140 funds) are in List A, which means they already satisfy the criteria.
Of the remaining 192 funds or so, about 79 funds or 41 per cent are closed to new money. The rest are in limbo as they struggle to fulfil the four criteria: lower expense ratios; a 3 per cent cap on sales charges; a three-year track record; and a top-quartile performance ranking among their global peers.
The top-quartile performance requirement remains the biggest sticking point. Morningstar is the consultant that screens the funds. The expense ratio requirement is fairly easily satisfied, with some managers opting to subsidise expenses.
The absence of some names among the List A funds is glaring. For instance, as at August, AIA had only two funds on the list. Notably, its Asian balanced fund Acorns of Asia - which has underperformed over three- and five-year periods - was not on the list. It has $1.2 billion in assets. Aviva was also absent. And DBS Asset Management had only two funds on the list.
There is also a thinning out of some types of assets - there are less than a handful of emerging market funds, for instance. Fees of emerging market funds tend to be higher than those of, say, global equity funds. Among unit trusts, there appears to be only one global balanced fund by Franklin Templeton on List A.
While funds are likely to seek re-evaluation in the hope of full inclusion, failure to qualify is likely to spark a shakeout in distribution arrangements. Unit trusts are typically bundled into ILPs and rebranded by insurers that may not have in-house fund management expertise. These arrangements are coveted by unit trust managers, as insurance savings are seen as 'sticky' long-term stable assets.
Insurers are likely to drop unit trusts that fail to secure full inclusion in favour of funds that do. Great Eastern Life has a number of funds that are yet to secure List A status, managed by Lion Global Asset Management.
A manager who declined to be named said: 'CPF inclusion is still quite important, but it's not crucial. Where it becomes crucial is with insurance partners, who want CPF eligibility.'
CPF met fund managers and insurers earlier this year to explain the requirement for top-quartile performance ranking. Besides quantitative data including analysis of a fund's risk/return profile, Morningstar will also scrutinise qualitative factors such as organisational strength and regulatory issues, investment style, process and implementation, and portfolio construction.
But with the January cutoff looming, some managers remain anxious about just how Morningstar reaches its conclusions.
One manager said: 'They have told us that we cannot have a manager managing diverse mandates. But it does not make economic sense to have a manager looking after just one mandate. Some of us will opt for another re-evaluation if we disagree with the comments.'
Another bone of contention is that funds may not stay in the top quartile for an extended period. Funds may be asked to go for re-evaluation if there are issues including a deterioration in performance, style drift, management turnover and securities held outside the mandate.
A chief executive said: 'In a broad sense, CPF is trying to restrict choice. It is looking at people's returns and thinking, 'members have done so badly'. But human nature is to buy at the top and sell at the bottom. The danger when you do this is you almost give your seal of approval to top-quartile funds. Technology funds 10 years ago would have been top-quartile.'
Not all managers are upset, however. One, at least, is fully supportive of CPF's efforts, saying: 'If you represent CPF members, what would you want them to have? The best funds and the lowest possible costs. With that as the objectives, what CPF is doing is logical. Advisers should now step up to help with asset allocation among the top-quartile funds.'
The big question is: with a narrower CPFIS menu, is it still possible to put together a decent long-term portfolio? Providend investment specialist Mudit Goenka said: 'There is a decent suite of funds, but the options are restricted and we can't express our view, especially on emerging markets.'
But the performance of Providend's CPF portfolios actually beat those of cash portfolios, which could be explained by lower costs, he said. 'The restrictions do make sense.' List A funds' expense ratios must not exceed the median expense ratios of their respective categories.
For those who do not consult financial advisers, the dearth of simple balanced funds means they will have to decide on the appropriate mix of equity and bond funds themselves
"If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong" - Bernard Baruch
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