Citibank adds class to funds

Asia's mutual fund industry is becoming a little more sophisticated with the launch of Citibank's new class of investment funds.

B-class shares, which carry no entry charge, were launched in Singapore last week and will reach the Hong Kong market in April. Citibank is partnering with a select range of fund houses such as Janus, Invesco, SSB Citi and New Alliance to offer the new range.

The funds, known as back-end load funds, carry an exit fee which is payable on redemption. The fee is charged on a descending basis over four years and the amount varies according to how long the fund is held. Those who redeem the fund after one year will pay a 4 per cent exit fee, shrinking to 0 per cent after four years.

The funds carry no initial sales charge, unlike A-class shares which are common in Asia and charge a front-end fee of up to 5 per cent. Under B-class shares, investors pay an additional annual fee of 1 per cent. There are no switching fees if the customer chooses to change to an A-class share after four years and the age of the fund is not affected if units are switched to a different B-class share.

'The nature of B-class shares is that they are held for longer,' said Malik Sarwar, regional head of investment business at Citibank. 'It is part of our policy of encouraging customers to create a long-term financial plan.'

Investors in Asia, where only 6 per cent invest in mutual funds compared with 40 per cent to 50 per cent in the United States, tend to switch in and out of funds quickly. Financial advisers encourage a long-term view and say investors risk losing out on solid returns by withdrawing their cash in a crisis.

Hong Kong investors pulled a net US$245.78 million from mutual funds in September as the Hang Seng Index dropped 8.4 per cent, illustrating the short-term outlook of many investors.

B-class shares had been available in the US for about 15 years, Mr Malik said, but not in other overseas markets such as Latin America and the Middle East. Citibank first offered them late last year as part of its offshore business and received a good response. They will also be offered in Japan and Taiwan later this year.

According to Stewart Aldcroft, managing director at Investec Asset Management Asia, similar funds have been available in Asia for about six years, but no one has had much success in marketing them.

'In Asia, we still have a long way to go until mutual funds become more widely accepted as a medium for savings and accumulation,' he said. 'Fund companies are trying to encourage people to invest for longer periods and invest more broadly so they will achieve better returns.'

Asian investors with more than US$100,000 to invest are typically able to obtain discounted terms on fees charged. B-class shares are easier to manage from a distribution point of view as there is no further negotiation.

Citibank has no plans at present to offer no-load funds in Asia, which typically have very low management fees and come with no value-added services.

'No-load funds took the US by storm in 90s,' Mr Malik said. 'But load funds were flourishing at the same time. With B-class funds, financial advice comes as part of the package.'

He said mutual fund charges were higher in Asia than the US, but in line with other markets. He expects prices to come down as more people choose to buy mutual funds and there is more competition.