Singapore Equity Market Reforms: Your Questions

After more than a decade of thin trading and shrinking listings, Singapore's equity market is back in the spotlight.

In a recent webinar, Morningstar's Hunter Beaudoin, Manager Research Analyst, Asia, Kristopher Leung, Customer Success Manager, and Siyan Hui, Morningstar Direct Specialist, discussed findings from the Singapore's Equity Market, Recharged report, covering what the Monetary Authority of Singapore's reforms mean for fund investors, how the new wave of Singapore equity funds stacks up, and how to evaluate managers in a market long criticized for concentration and limited liquidity.

Here are some of the most pressing questions they addressed.

Hunter: While I wouldn't make a blanket statement either way, investors should consider the alpha potential of the market and fees. Regulatory diversification rules currently prevent active managers from matching or overweighting the Straits Times Index’s largest stock exposure amidst rising concentration. At the same time, passive Singapore equity funds generally overlook small and mid-caps which active funds have increasingly allocated to. This segment may offer greater return potential through exploitable market inefficiencies and mispricings.

Passives are appealing for their low costs, as low-cost funds have a higher chance of surviving and outperforming their more-expensive peers. But active funds — including some EQDP funds — have their own strengths. We don't formally cover J.P. Morgan's EQDP fund, for example, but we do rate the underlying capabilities highly: its Singapore sleeve draws on a well-regarded ASEAN team, and we have conviction in its Asia-Pacific ex-Japan sleeve on managers via our coverage of their JPM Asia Equity Dividend strategy.

When weighing options, lean on Morningstar’s Medalist Ratings and the underlying research into each fund’s team, process, and performance drivers rather than fees alone.

Hunter: It's not black and white, since the program sweeps in a wide variety of managers.

Established managers generally offer a more reliable foundation — provided they meet a few conditions: a demonstrable track record in Singapore equities, evidence of adding value in small- and mid-cap stocks with prudent liquidity management, and sufficient research resources to cover the broader cap spectrum the program emphasizes.

That said, newer strategies can bring something genuinely differentiated — a fund structure or investment process not previously available in the universe. In either case, robust fund selection and attention to fees matter most.

Hunter: Not all managers are on equal footing. Global managers may have more capital to fund research and, for funds sold outside of Singapore, wider distribution networks and stronger brand name recognition.

Local managers, by contrast, may prioritize the Singapore market more heavily, since it can represent a larger share of their business; that can translate into more dedicated resources and deeper stock coverage in the asset class. That said, these are generalizations, and in reality, outcomes are highly dependent on the specific firm. It's also worth remembering this is still early innings: not all funds in the first two EQDP batches have launched. A third batch is coming, and some funds may ultimately struggle to compete and meet program conditions such as demonstrating commercial viability.

Hunter: Within the Medalist Rating methodology, we assess three fundamental pillars — people, process, and parent – while a price score explicitly factors in the cost of each vehicle. For passive funds, the Process pillar carries more weight than actives, and it's evaluated differently. For active funds, process is about the manager's edge, how consistent execution of the approach is, the risks it entails, and whether it can add value versus the benchmark and category peers across the cycle.

For passive funds, it's more about the index construction— how diversified or concentrated it is and how representative it is of the opportunity set available to active peers. It also considers the opportunity for actively managed investments to outperform passives and the passive fund's approach to tracking the index.

The Medalist Rating for passive funds also places a slightly higher weighting on the price score. Right now, the passive funds under analyst coverage in the Singapore equity category carry the highest Medalist Ratings largely because of their very low fees — expense ratios around 30 basis points versus roughly 140 for active funds — even though their Process ratings are only Average due in part to index concentration. However, that doesn't mean all active funds lack merit in the asset class.

Kristopher: The performance metrics — return, Sharpe ratio, standard deviation, maximum drawdown — are well covered and easy to find. What investors more often overlook are the qualitative measures.

The Success Ratio is a newer Morningstar concept that captures how often a manager's funds both survive and finish in the top half of their category over three years. Another is size and style drift, which shows whether a manager has held steady on market-cap and style exposure over time — a useful signal of discipline and consistency, which we've found matters a great deal to long-run success.

Cost-focused measures like the total expense ratio and Morningstar's representative cost figures are also more valuable than many investors realize.