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Thursday, October 29, 2009

Funds sweat over new CPFIS criteria

Funds sweat over new CPFIS criteria

Business Times - 29 Oct 2009

Some 40% risk being struck off; top quartile ranking is sticking point


(SINGAPORE) More than 40 per cent of the unit trusts and investment-linked insurance funds (ILPs) in the CPF Investment Scheme (CPFIS) are at risk of being struck off the scheme if they do not fully comply with CPF's admission criteria by January 2011.

By far the most contentious among the criteria is the one requiring the funds to be ranked among the top quartile (the highest 25 per cent) of their global peer group.

This is the sticking point, as fund managers can and have stepped in to ensure compliance with the other criteria. For instance, some managers subsidise the expenses of smaller funds to ensure that their expense ratios do not exceed CPF's caps.

Top quartile is defined along quantitative and qualitative factors, where a fund registered for Singapore sale will be scored and ranked alongside its global peer based on Morningstar's database. Morningstar is the investment consultant for the CPFIS.

Among ILPs, CPF savings' share of a fund's assets could be as high as 70 per cent. Among unit trusts, the share ranges between 30 and 50 per cent. Hence, for some funds, failure to remain in the scheme would have major implications.

As at end-June, a total of $22.9 billion of CPF savings (Ordinary and Special Accounts) is invested in insurance policies and $6.3 billion in unit trusts.

BT understands that numerous funds are scheduled for re-evaluation by Morningstar over the next few months. Some have already made it to the approved list. But those are understood to be a minority so far as most funds are awaiting their turn in a long queue, or are waiting to be told the results.

Based on a list released earlier this year, a total of 147 funds need to be re-evaluated. There are a total of 346 unit trusts and ILPs in the CPFIS menu. The cost of re-evaluation is $5,900 per fund, which may or may not be charged to the fund.

Funds which fail to meet the criteria must cease to take in fresh CPF savings by January 2011. Managers must offer investors three options - to hold, redeem or switch for free to another fund that is fully compliant with the CPF rules. The free switch period is understood to be six months.

An alternative for funds that fail to meet the criteria is that managers could opt to have the fund sub-advised by a third-party manager which must have passed CPF's screen.

BT understands, however, that the idea of external management is unattractive to most managers. In any case, it may not be feasible for larger fund houses such as Fidelity, where the size of its CPF asset base is tiny relative to its offshore investor base.

A unit trust that contemplates a third-party manager may have to call for an extraordinary general meeting to vote on the matter.

The chief executive of a fund management firm said: 'The exercise is very subjective. I don't see how there can be a clear and objective way to measure top quartile ranking.'

He says his firm is not inclined to opt for third-party management, should any of the firm's funds fail to pass muster. 'What makes (the CPF and Morningstar) think a sub-adviser will do a better job?'

However, a source at another firm said: 'If we have to use an external manager, of course we will do it. . . Because if a fund is taken out of CPFIS, what happens to existing investors? They can't do top-ups and it becomes very confusing.'

The other three criteria are that the funds' total expense ratio must not exceed the median expense ratio of CPFIS funds in their respective risk class; their sales charge must not exceed 3 per cent; and they must have a three-year track record.

The admission criteria have been in place since 2006, but they have so far been enforced in stages to enable funds to make the transition.

Some of the largest and most established funds are slated for re-evaluation. These include Prudential's Prulink Singapore Managed Fund, which has more than $2.5 billion in assets as at end-June; and AIG's Acorns of Asia Fund with over $1.2 billion in total assets.

Prudential Assurance's chief marketing officer Tomas Urbanec said the insurer has 19 funds in the CPFIS scheme. Five are fully compliant and 14 await re-evaluation.

'As this is an industry-wide exercise which is ongoing, we would prefer to let CPF announce the final approved list when the exercise is completed.'

Morningstar's quantitative criteria for product inclusion in the CPFIS include performance and style consistency, management tenure - that is, funds with minimum manager changes are preferred; and expenses.

The qualitative analysis looks into a manager's history of success, organisational strength, investment process consistency, and asset size and growth. On the latter point, Morningstar looks into how performance has changed as assets grow.

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