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High fund expense ratios put Singapore retail investors in a bind
FUND fees in developed markets are under immense downward pressure - but this seems hardly evident in Singapore where actively managed funds dominate.
Based on Morningstar data for funds registered for Singapore sale, the average total expense ratios (TER) of major fund categories such as US large cap growth equity and Asia ex-Japan equity funds exceed 1.8 per cent. Those for single country funds and specialist theme funds may exceed 2 per cent.
TERs reflect a fund's operating costs as a proportion of net assets. Included in the cost calculation are the annual management fee, audit and trustee fees, among others. Typically the larger the asset base, the smaller the TER, but even in this respect, many Singapore-registered funds defy this logic.
Large funds managed by firms such as Franklin Templeton, where assets exceed US$1 billion, may still show TERs of over 2 per cent.
This leaves retail investors in a quandary. High TERs dilute returns at a time when forward expectations of fund returns are muted at best. For an investment of S$100,000, a TER of 1 per cent - assuming an annual return of 5 per cent - would generate a value of over S$324,000 after 30 years. If the TER was 2 per cent, the final value would be S$242,000, which means that over S$82,000 was eaten up by costs.
Even multi-asset funds, which are positioned as a core holding for retail investors, carry significant TERs. A multi-asset fund with a conservative profile (about 70 per cent fixed income) has an average TER of 1.32 per cent; and 1.7 per cent for an aggressive (70 per cent equity) allocation.
Lion Global recently launched an actively managed multi-asset fund - the LionGlobal All Seasons Fund series - where the TER is capped at 0.5 per cent. This is unusual in a landscape dominated by bank distribution, which partly accounts for why fund costs seem intractable.
Banks typically retain most of the sale charge and a portion of the annual management fee, also called a trail fee. The Lion Global fund is available through some online portals and its sole bank distributor is OCBC.
In order to remunerate distributors, the unit trust structure that is sold to retail investors is the "A'' share class and the most costly. The full management fee is charged in order to have some margin to pay distributors.
Declining CPFIS menu
But most fund firms have also registered a wholesale variant - also called a "clean-fee'' share class - where the annual management fee may be half that of the A share class. This share class does not allow the payment of rebates or commissions to distributors. They are typically used by private banks or financial advisers for discretionary portfolios, where a separate advisory fee is charged.
The wholesale share class may allow distributors to levy a sales charge, but for discretionary portfolios, this is typically waived.
As CPFIS is a long-term pension savings scheme, all the funds should ideally be of the wholesale class. Advisers may then be remunerated through a wrap or portfolio fee. Charging a separate advisory fee forces accountability for advice, in contrast to the A share class, where distributors are paid a trail fee if investors stay invested. But banks typically do not proffer advice apart from the initial sale, and neither do unitholders demand it.
At the moment CPFIS allows annual wrap advisory fees of up to 1 per cent. But this will be cut to 0.7 per cent in October, and further to 0.4 per cent in October 2019. These changes are part of the Government's efforts to reduce investment costs for CPF members. The big question, however, is whether 0.4 per cent is enough to reward financial advisers for advice as it includes portfolio maintenance.
Given this backdrop of high retail fees, it is unsurprising that a significant number of unit trusts and ILPs are relegated to CPFIS' "List B'' funds. List B funds are those which fail to meet CPFIS caps on funds' TERs and are barred from taking in new CPF savings. Based on CPFIS latest available data, there are 33 ILPs and 17 unit trusts on List B. These comprise nearly 20 per cent of the total 256 funds in CPFIS.
The number of funds in the CPFIS menu has declined steadily since 2014 when the CPF Board announced a tighter set of criteria for inclusion, which were fully implemented in 2016. There are the four criteria: Funds must have a track record of "good'' performance for at least three years. They must have top quartile performance relative to the global peer group. They must meet TER caps, and sales charges must not exceed 3 per cent. From October a lower sales charge of 1.5 per cent will apply. This will be cut to zero in October 2019.
At end-March 2014 there were a total of 287 funds in CPFIS, compared to 256 funds in Q1 2018. This represents a reduction of about 10 per cent.
In that period, the number of unit trusts fell by 22 per cent from 113 to 88 funds. The number of ILPs fell just marginally from about 174 to 168 funds. Historically there are far more CPF savings flowing into ILPs than unit trusts, but CPFIS has ceased to disclose that data.
Between 2014 and 2018, some 63 funds were delisted from CPFIS, compared to 38 new listings. Fund managers may request to delist their funds. CPFIS and its investment consultant Mercer may also decide to delist a fund, should a fund fail to meet any criteria upon re-evaluation.
The big rub for Singapore savers is that even as CPFIS seeks to reduce TERs by imposing caps, the universe of funds available for retail sale via cash have average TERs that actually exceed the CPFIS caps, leaving them hard pressed for lower cost alternatives.
These are the TER caps imposed on CPFIS funds: 1.75 per cent for higher risk funds; 1.55 per cent for medium to high risk; 0.95 per cent for low to medium risk; and 0.35 per cent for lower risk funds. All-equity funds are classified as high risk; balanced and asset allocation funds are generally medium to high risk; fixed income funds may be low to medium risk.
Relook at fees
The silver lining is that some fund houses are re-examining their fees. Franklin Templeton, for instance, recently reduced the annual management fee of the Templeton Emerging Market Fund from 1.6 to 1.15 per cent.
Templeton has also created a separate "AS" share class for CPFIS, where fund expenses are subsidised to a degree to maintain TERs below the caps. A separate share class would "ring fence'' the CPFIS assets for subsidy.
Manulife has three funds that carry the John Hancock brand, which are in List B. Manulife Singapore acting chief product officer Matthew Hoover said work is underway to merge the John Hancock ILP sub-funds into the Manulife range with similar investment strategies. This will be completed by the end of the year. "The Manulife ILP sub-funds are in CPFIS List A. Once this exercise is completed, the TER cap will need to be adhered to and customers will be able to top-up and switch into these funds using CPF monies.''
Aviva funds have one of the highest TERs among ILPs in CPFIS. It has 12 funds in List B, accounting for about a third of the 33 ILPs in List B. Aviva's ILPs typically feed into unit trusts. Due to high ILP costs, it is not unusual to have a unit trust under List A, which meet all criteria, but the Aviva feeder is in List B. For example, the Aviva Aberdeen Pacific Equity fund has a TER of 3 per cent, compared to Aberdeen Pacific Equity unit trust TER of 1.67 per cent.
Aviva said it has chosen to reflect "bundled product charges'' that are external to the underlying fund "so it is easier for our customers to understand''. These costs include sales charge, top-up fee, policy fee and bid-offer spread among others. "In contrast, other ILP providers do not include those product charges under annual management charge, and list those product charges as separate items, so resulting in a lower TER.''