Recent Fund Closures Seen In Another Light

Recent Fund Closures
Seen In Another Light

1. What do you make of the fund closures in the past two weeks (AIG and Allianz)? Some have said it's a healthy sign while others were less sanguine about the closures.

The fund industry is a growing one here and certainly there will be changes during the process. I think one of the reasons why certain funds have been closing is because many of these funds are feeder funds. A feeder fund structure is a fund registered here in Singapore that mainly invests investor's money here into the underlying mother fund which in most cases, is an offshore fund. With the liberalized rules we have today, fund houses are allowed to bring offshore funds directly into Singapore for sale. Thus, from a cost point of view, it then becomes much more efficient for the fund house to bring in their offshore mother funds instead of incurring the costs of registering a feeder fund here and then running it. The cost to the fund house becomes more pronounced if the size of their feeder fund here is small. Ultimately, fund houses are businesses as well, so if there are cost savings which they can perform, then they are likely to pursue them.

2. What would be the impact on investor's confidence/the fund market?

Currently, investors perceive a fund closure to be a bad thing and the entire spate of closures by fund houses is also seen in a negative light. So, for now, certainly, the fund closures are not adding to investor's confidence in the fund market. However, if more investors understand why a fund closes, and the difference between a fund closing and a stock going belly up, then the impact can be reduced. For instance, when a stock is closed to the market, it is often a very abrupt event. Something bad happened to the underlying company. Investors are often unable to get back any of the money they invested. However, when a fund closes, it is not the same thing. When a fund closes, all its holdings are sold, and the money is then returned to investors. Investors may have gained or lost money depending on the difference between the price they bought the fund and the price of the fund when it closes. Also, fund houses and distributors will often offer free switching as a gesture of goodwill for the closing of the fund. So, the investor should not panic in this case.

In actual fact, a fund house would not try to close a fund if it can help it simply because they do not wish to invite bad press. Indeed, they may subsidise the costs of running the fund for quite a while before they decide to close the fund. However, when they acknowledge that the fund is not a viable prospect, they will then close the fund. Very often a small fund size does affect a fund's costs. However, few funds start out huge. Thus, it would be a loss to the industry and investors if everyone were to stick to just the large funds. This is because the fund houses will then not wish to bring any investment fund into Singapore unless they are confident they can raise a large amount from it. This will result in less variety and less investment options for everyone here.

I know that there are many good funds in the market and fund houses are bringing in more. So, I personally hope that the spate of fund closures does not rock investor's confidence in funds too badly. As the government opens up the finance sector in Singapore more and more, there will be good and not so good investment products being introduced to Singaporeans. Hence, the importance of learning about investing and investment products then becomes even more critical.

3. Do you think there are too many funds offered here in Singapore? What is your current assesment of the local fund market? Could you give a rough estimate of the number of funds that are offered here?

No, I do not think there are too many funds in Singapore. Hong Kong has more than 1,000 funds. As long as investors can obtain up-to-date, clear information about all the funds here, then more product choices become available and that's better for investors. (For example, Fundsupermart has a lot of detailed information on hundreds of funds). The greater availability of choice that comes with having more funds in the market should never be a bad thing. When the fund industry first started out, it was dominated by a few of the large local banks and the only products available were Singapore equity funds, a handful of fixed income funds and Asia equity funds. As a result, Singaporean investors had few opportunities to take advantage of the US bull market in the nineties, and the Japan bull market in the eighties. Today, we have many more products (I estimate that that there are close to 700 funds in the market, if you don't include repeat funds that are sold in a different currency.) and so, the possible investment choices to Singaporean investors have opened up tremendously. However, investors do need to find out more about investments these days because with the wide variety of choice out there, not everything will be suitable for them.

4. Is there an optimal size for a fund to be viable?

I think the costs varies from fund house to fund house. There may be some fund houses that wish to maintain their reputation, plus, they take a longer term view that eventually, a small fund will attract more funds with a successful performance and they will hence continue to subsidise a fund's cost even if it is not viable. The structure of the fund also may determine what size it needs to be to be viable. The way some funds are run may also necessitate a higher cost because they require research into obscure and illiquid markets. However, based on our observations and experience, a fund size that is under 5 million seems more likely not to be viable.

Wong Sui Jau (CFP, Research Manager and a licensed investment representative) is part of the Research and Editorial team at Fundsupermart, a division of iFAST Financial Pte Ltd.

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