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...by offering mutual fund products. To remain competitive, banks should shed their reputation as incapable of generating impressive fund returns, as customers may not be informed that bank funds are comparable in performance to non-bank counterparts. Banks need to differentiate their fund characteristics and reduce portfolio management costs to gain a competitive advantage.
Keywords: Bank-managed Funds; Fund Performance; Wealth Management.
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With financial deregulation increasing competition between local and foreign banks, insurance companies as well as investment firms, the fund management industry has become critical for banks, whose profitability can be improved by offering competitive mutual fund products (Gallo, Apilado and Kolari, 1996). In order to compete in the fund management industry, banks have to offer products that do not under-perform their counterparts from insurance and investment companies. With financial deregulation in the Asia Pacific countries easing entry of foreign competitors, local financial institutions in small economies have to withstand erosion of investor monies by foreign competitors. Besides offering competitive funds, banks need to shed their image of being under-performers in the asset management industry.
In the popular press, performance of bank-managed funds has been perceived as inferior to their non-bank counterparts, even in the most developed economy. In the United States, McTague (1994) claimed bank funds were non-aggressive and incapable of generating impressive returns. As a result, various investors expecting tittle returns from bank funds were reluctant to invest in them. However, banks in the USA were relatively new to fund management, previously being prohibited by the Glass-Steagall Act before the Federal Reserve Board allowed them to manage funds (Gallo, Apilado and Kolari, 1996). From 8 per cent of total mutual funds in 1991 to 14 per cent in 1999 worth more than US$255 billion, bank funds' rapid growth questioned their reputation as under-performers compared to non-bank counterparts (Frye, 2001).
Besides the US, banks' under-performing image was also perceived in other developed countries. The chief executive of AMP, a popular wealth management company in Australia and New Zealand, commented that it was difficult for banks to compete with specialist investment companies. As a result, there were few international banks that were very successful in fund management. The comment was made concerning Australian banks' purchases of wealth management companies since 2000 totalling A$19 billion (including Commonwealth Bank of Australia's A$9 billion acquisition of Colonial First State, National Australia Bank's A$5 billion purchase of Mutual Life & Citizens' Assurance, Australia and New Zealand Banking Group's A$4 billion joint venture with Dutch ING Group, and Westpac's A$1 billion acquisition of Bankers Trust and Rothschild) which had mostly delivered unimpressive returns (Moullakis and Patten, 2005).
In reviewing the literature, it was noted that while earlier research indicated underperformance of bank funds compared to non-bank counterparts (Bauman and Miller, 1995; Bogle and Twardowski, 1980), later research did not detect under-performance (Frye, 2001). According to Frye (2001), earlier research reporting relative underperformance of bank-managed funds ignored their differing fiduciary standards. However, she focused only on bond funds as banks in USA had more assets under management in bond funds rather than equity funds. It is not known how bank and non-bank equity funds compare when faced with the same fiduciary standard. Examining domestic equity funds approved by Singapore's Central Provident Fund (CPF) Board for its CPF Investment Scheme facilitates a more direct comparison of funds managed by banks and non-banks than previous studies, as CPF-approved funds face the same standard for managing social security savings.
This study contributes to understanding competitiveness of bank-managed funds by exploring relationship between type of fund management organisation and past performance for Singapore's retail equity funds. The majority of fund management research were conducted using data from the USA and other large developed markets, leaving many small markets unexplored in the literature. Among developed equity markets identified by Ibbotson and Brinson (1993), little research was published on the fund industry in Singapore, one of the smallest economies in the world. Examining Singapore's CPF-approved equity funds offers an opportunity to control for differing fiduciary standards. As all bank-managed CPF-approved equity funds are from domestic banks, this research reveals performance of these banks in Singapore's fund management industry when competing with local as...
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