The Basics of Fund Management: Explained
As a leading financial hub in the Asia-Pacific region, Singapore’s favourable tax regime, excellent infrastructure, and stable political and economic environment make it attractive for businesses to engage in fund management activities. However, not everyone has the time or inclination to go through the process. This is where a licensed fund management company or an investment management firm, represented by a fund manager, comes into the picture. The media landscape is crowded with investment advice, but licensed fund management companies offer an alternative for those looking for professional help.
What is Fund Management?
Fund management refers to an investment manager overseeing the investors’ investments and assets to achieve a return on investment. It also involves the investment manager making an informed decision on the securities to invest and managing the portfolio to maximise returns while minimising risk.
Fund Management Process
Fund management’s objective is to maintain an entity’s value, both intangible and tangible assets. It involves operating, deploying, maintaining, disposing of and upgrading assets cost-efficiently to maximise profits. The invest manager will pay attention to the close and risk to capitalise on cash flow opportunities and ensure fund liquidity.
What do Fund Managers do?
Now, what is a fund manager? What does this person do? Typically, fund managers of a fund management company Singapore are responsible for implementing the right investing strategy and management. They create an investment plan, oversee the portfolio’s trading activities and direction, and work with analysts to conduct comprehensive research to make the right investment decisions.
A good fund manager will assess their client’s short or long-term financial goals before deciding on the proper portfolio management or investing strategy. Young people in their mid-20s will probably have a more aggressive risk profile where they’re willing to invest in more volatile assets such as stocks. This is in contrast to a couple in their mid-50s who are looking forward to their retirement, where they will likely have a conservative risk profile and their ideal investment asset allocation or portfolio will consist of asset classes mostly with stable returns, such as government bonds or blue-chip equities.
Classifications of Fund Management
Fund setup can be classified into three categories: client type, management method, and investment type. A fund manager manages all three. At Lanturn, we provide fund administration and comprehensive fund formation services. Our expert team guides you through setting up your fund, from structuring it to navigating regulatory requirements.
By Client
Let’s delve deeper into what is fund management. How does it work? There are three types of clients: corporate, personal and family offices. All three may have high net worth, but individual clients often have a smaller net worth than corporate clients and family offices.
By Method
Methods of managing funds can come in two ways: active and passive management. Typically, your fund manager of a MAS registered fund management company will consistently keep tabs on what is happening in the market. They buy or sell your assets to maximise profits, whereas passive income is the opposite. The manager will likely keep it on an index fund, so you get exposure to all industries available in the market.
By Investment Type
Investment type refers to the asset class or types you’re investing, such as mutual funds and pension funds. These funds will likely consist of investments aligned with the client’s risk profile after being assessed by the fund manager. Certain investments, such as the Singapore Resident Fund scheme, are tax exempted as they are considered ‘specified income’. This scheme is available to fund managers handling funds domiciled in Singapore. The fund vehicle must be a Singapore corporate entity, including VCC and a tax resident.
To have a better understanding of the investment types, here is an overview of the other popular investment types:
Mutual Funds
It’s an investment fund that pools money from multiple investors to invest in securities like stocks and bonds, allowing them to access diversified, professionally managed portfolios. In addition to equity, bond, and money market funds, there are hybrid funds combining different types of investments. A fund manager will select the most suitable stocks, bonds, and securities that align with the fund strategy.
A venture capital fund manager holds a more extensive portfolio after investing in startups with high growth potential.
Bond Funds
Bond funds invest primarily in corporate and government bonds to achieve diversification. With the pool of money from other investors, the licensed fund management company Singapore will buy and sell according to market conditions, while some fund managers hold the debt securities to collect interest and principal payments.
licensed fund management company Singapore will buy and sell according to market conditions and rarely hold bonds until maturity.
Index Funds
The benefit of an index fund is that it has lower expenses and fees than actively managed funds. A fund manager will use a passive investing strategy, trading as little as possible to keep costs low.
Equity Funds
The benefit of a mutual fund is that it pools investor money to invest in various companies that offer potentially higher returns, in addition to diversifying the investment portfolio. A fund manager will use various investment strategies to achieve their investment objectives.
Balanced funds
Diversifying multiple assets with a mix of low—to medium-risk stocks and bonds aims to balance the fund’s nature and protect the investor’s money. A professional fund manager will oversee the funds and pick the assets to ensure they perform well.
Investment Management
The objective of investment management is to generate returns while minimising risks. The fund manager will assess the client’s needs and financial goals, create an investment plan, and execute the strategy.
Income Funds
Investors will receive an income on a monthly or quarterly basis from investing income funds rather than waiting to receive them at a later date. Fund managers can either hold the debt instruments until maturity to earn interest or sell the instruments when the prices rise to book capital gains.
Interval Funds
Shareholders can sell a portion of their shares at regular intervals at a price based on the fund’s net asset value (NAV). Interval funds allow managers to use a broader range of investment strategies, including those with less liquid securities than in open-end funds.
Pension Funds
Investors in pension funds usually aim for portfolio diversification by investing their capital in different investment instruments, such as stocks and bonds. The fund manager then regularly evaluates these investments’ performance to ensure they generate optimum returns.
Exchange-Traded Funds (ETF)
Exchange-traded funds offer portfolio diversification and more stability than investing in an individual company. They are pooled investment funds made up of stocks, bonds, and commodities. Unlike mutual funds, which are usually actively managed, exchange-traded funds are passively managed by fund managers.
Real Estate Investment Trust (REIT)
REIT investors will receive a steady income from real estate that is normally distributed at regular intervals despite limited capital appreciation. A fund manager will oversee investments and portfolio protection.
Cryptocurrency
Cryptocurrency is a growing investment option for investors who can tolerate market volatility and risk. The fund manager will then navigate the crypto market through market analysis, selecting assets strategically to maximise returns and manage risk.
What are Fund Management Styles?
When it comes to investing, there are various fund management styles. Here are a list of common approaches and styles:
Growth Style
Fund managers focus on current and future corporate stock and are willing to pay higher valuation multiples for these stocks, given the expectation of high growth. They will select companies with strong revenue and earnings growth, often with high price-to-earnings ratios. This growth style performs well when the markets are rising, and managers should demonstrate their ability to achieve investment objectives even during downturns.
Growth at Reasonable Price Style (GARP)
The GARP style combines growth and value investing attributes, and the portfolio will focus on companies that consistently perform above broad market markets. The sector breakdown of these portfolios might differ slightly from that of the benchmark index. This is to take advantage of the growth prospect of these selected sectors since their ability can be maximised under certain conditions.
Value Style
Fund managers who use the value style thrive on bargains. They invest in stocks considered undervalued by the market and trade them at prices below their corresponding intrinsic values. The objective is to extract the maximum benefit before the stock reaches its peak.
Fundamental Style
Recognised for their cautious approach, fund managers use a fundamental style that typically aims to match the returns of a benchmark index by mimicking its value. Capital gains are achieved by underweighting or overweighting specific sectors or securities, with differences being regularly monitored.
Quantitative Style
Fund managers using quantitative style rely on computer-based models that track price and profitability trends, identifying securities with higher-than-market returns. They consider broader market movements, evaluate trends, study regime changes, and analyse asset prices and market volatility.
Risk Factor Control Style
The risk factor control style emphasises managing exposure to both asset classes and external managers. This fund management style considers all the risk elements, such as portfolio duration compared with the benchmark index, overall interest rate structure and the breakdown of securities by category of issuer.
Bottoms-up Style
The bottom-up investment approach focuses on analysing the quality of a company’s finances and situations before considering the overall outlook of the specified sector and the economy. This deep understanding of a specified company and its stock provides insight into an investment’s long-term growth potential.
Top-Down Investing
The top-down investing approach requires the fund manager to identify the overall outlook of the economy and its components before looking into different macroeconomic variables of the individual companies. This analysis aims to determine which regions and which industries stand to profit.
Key Requirements for Singapore Fund Management
Setting up a fund management company in Singapore is becoming an ideal choice for fund managers due to the city’s stable political and economic environment. Here is an overview of the key requirements for fund management companies in Singapore:
Fit and Proper
A fund management company must demonstrate to the Monetary Authority of Singapore (MAS) that its shareholders, directors, representatives and employers meet the MAS’s Guidelines on Fit and Proper Criteria. This protects the investor’s interest and financial stability and enhances Singapore’s overall reputation in the financial industry.
Fund Administration
It’s mandatory for a fund management company to ensure independence or show its adequate segregation of duties, especially for functions like valuation or funding accounting. The company acts as a fund register and handles client reporting, such as sending monthly account statements.
Annual Independent Compliance Audits
Engaging an external auditor to perform an annual independent compliance audit is one of the key requirements. The auditors will report the auditor’s report with their opinion of the financial statements and to show their compliance with key licensing and business conduct requirements to MAS.
Anti-Money Laundering (AML) Framework
With the constant movement of funds globally, it’s mandatory for all fund management companies to establish an anti-money laundering framework to identify, assess and mitigate the risks associated with its money laundering and terrorism financing. This is the stage when fund management companies will need to implement robust KYC (Know Your Customer) policies.
Custody Arrangement
Fund management must place the customer’s monies and assets with a licensed, registered, or authorised custodian in the jurisdiction where the monies or assets are being held. Though fund management companies may not have a direct responsibility for appointing the custodian, they will still need to demonstrate that they have taken reasonable steps to ensure adequate asset protection.
Tax regimes for funds and fund managers
Singapore is becoming a preferred location for fund vehicles due to its ease of doing business and attractive tax incentives for fund and fund managers. Beyond the traditional offshore fund jurisdictions like the Cayman Islands, Singapore is well-known for having one of the most attractive regulatory and tax regimes for the fund management industry.
The Tax Exposure of Funds Managed by a Singapore Fund Manager
Fund managers are liable to be taxed in Singapore for fund management activities. The fund manager may create a taxable presence for the fund, making certain income and gains Singapore-sourced and subject to tax. However, this tax liability can be eliminated under Singapore’s tax incentive schemes for funds, provided the conditions are met.
Synopsis of Tax Incentive Schemes in Singapore for Funds
There are three main tax exemption schemes available to funds managed by fund managers under which ‘Specified Income’, including gains derived by the fund from ‘Designated investments’, is exempted from tax. All funds that qualify for any of the following tax exemption schemes as of 31 December annually may enjoy the tax exemption for the life of the fund, provided the conditions are met.
Fund Set-up options
Funds in Singapore can be set up as private limited companies, unit trusts, limited partnerships, and variable capital companies (VCCs). Each has advantages and disadvantages.
Private Limited Companies
A popular option among private equity investors in Asia, companies can take advantage of Singapore’s wide array of tax treaties. However, setting up funds under Private Limited Companies requires the company to comply with Singapore’s Companies Act. The company will need to file annual returns, make certain information about the company available publicly, prepare relevant resolutions, and update the details of the redemption of preference shares with ACRA.
Unit Trust
The advantage of choosing unit trust is that it is not governed under Singapore’s Companies Act. However, the compliance cost may be higher due to the necessity of appointing a Licensed Collective Investment Scheme (CIS) Trustee.
Limited Partnerships
Limited Partnerships require lesser compliance requirements as they are governed under the Limited Partnership Act in Singapore. There is far less required public disclosure than companies. However, Limited Partnership does not benefit from Singapore’s cross-border tax treaties.
Variable Capital Company (VCC)
The new Variable Capital Company (VCC) offers benefits, such as greater flexibility in open-ended and close-ended funds strategies, improved tax efficiency, cost efficiency, and promoted foreign funds re-domiciliation, making it attractive for venture capital fund managers and private equity companies. VCC also enables the creation of multiple share classes with varying characteristics, such as voting rights, dividend preferences, and redemption rights.
For Your Business Success
Are you looking for reliable fund administration and fund services in Singapore? Look no further! Partner with Lanturn. Serving over 600 clients, we provide comprehensive and tailored solutions to meet your fund management needs. Our dedicated team of experts has a wealth of experience in regulatory compliance and industry practices. Take your fund management in Singapore to the next level, and contact us today to explore how we can support your success.
