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What Should You Know in Managing PVD?

 

          Selecting an asset management company

           Selecting a suitable investment policy for the fund

           Monitoring the fund performance

 1


Selecting an asset management company

       
   "3C" The key success factors in selecting an asset management company

 
          Selecting an asset management company is a very vital step. The fund committee must study these companies carefully before making a deal and putting all the trust in them.

          Either it is a newly established fund that is looking for an asset management company or an existing fund that is deciding to make a new deal with a different company, the fund committee must seriously be responsible for the selecting process because this has a huge impact on the members’ benefits. The followings are how 3C plays the part.

          Starting with…..

             Criteria

                    Criteria used in order to help deciding or judging on an asset management company must be established. Two main criteria are operating system and stability. However, it is not necessary to weigh each criterion equally.

                    
1. Operating system

                             Good operating system can act as an assurance that the company can support the provident fund business properly and safely. It must also be useful for members. One can determine whether the company has a good operating system by looking at the followings.

                            
 Investment management system

                                       
  Investment decision making process  This involves many processes from deciding on what asset should be invested to considering the decision making process of the fund manager. One needs to determine whether there is an investment committee considering the investment, who the committee are and what they are responsible for. Moreover, one should consider how fund manager makes investment decision.

                                       
 Information assisting in making decision such as analysis from in-house research or broker, financial statement, and information obtained from visiting listed companies.


                                       
 Asset allocation In the case that the fund manager sends buying/selling order of the same securities for many funds under his management but he cannot get the whole amount of the order, how he makes an allotment for those funds.

                                       
 Conflict of interest  What is the process when the asset management company deal with the conflict of interest transaction? Do they have to get any approval from the fund committee before executing the transaction?

                             
 Member registration system and collection and disbursement system

                                      
 Channel of receipt and disbursement
                                      
 Timeliness of payment
                                      
 Accurate and assured data base and member registration

                             
 Information disclosure system

                                      
 Channels of information disclosure such as via mail, email or website
                                      
 Disclosure of the fund performance
                                      
 Monthly report on investment for fund committee
                                      
 Report on the amount of contribution and benefits, number of units and unit value for members at least every 6 months

                             
 Internal control

                                     There must be internal control procedure to assure that the operation of each department within the company complies effectively with rules and regulations. For example, there is a measurement to prevent transactions dealing with conflict of interest and employee’s fraud or having a clear investment decision making process.

                             
 Complaint handling

                                      There must be a responsible unit to handle complaints and process them within a certain period of time.

                             
 Other services

                                      
 Establishing member education through seminar or printed matters.
                                      
 Assisting fund committee by giving useful advice on how to supervise the fund.

                   
 2. Stability of the company

                             In order to ensure that the asset management company can manage funds smoothly and continually in any circumstances, these issues should be taken into consideration,

                                Past performance : This can be checked from the company’s financial statement or annual report.
                                The company’s executives : Check on the executives’ experience on managing provident fund and the policies toward the fund. Moreover, this could also means to check on the executives’ illegal record.
                                The fund manager : Consider what type of funds that the manager have managed and what type of funds he specializes in.
                                Indemnity insurance : Determine whether the company has any indemnity insurance or whether it has any policies to prevent damages.

                             However, the fund committee should have less concern on the stability of the asset management company because the fund’s asset will be segregated from company’s asset and will be kept by custodian. Therefore, when the asset management company faces any financial problem, the asset of the fund will not be affected.

             
Collection of Data

                       You can find a list of asset management companies on www.thaipvd.com and www.aimc.or.th.
                     
 You can request more information from the companies you’re interested
If you’re particularly interested in any companies, you can ask them to give a presentation on what services they offer and answer any questions.

   
          Consideration

                      Each management company should be graded on the above mentioned criteria. If the result favors each company equally, other factors such as management fee, custodian fee, auditor fee and fund administrator fee can also be taken into consideration.

                    
 After making the decision on what company is selected, the next step is to make a contract between the fund and the asset management company. The fund committee should consider carefully on duties and responsibilities of the company, the investment restrictions, information disclosure and contract cancellation fee.

           
  At this moment the fund committee should understand more about "3C" which is the key success factors in selecting an asset management company.
 

2

   Selecting a suitable investment policy for the fund

        
           Since members are different in age and each member has different favor in accepting risk or return from investment , fund committee must select an appropriate investment policy for the fund. Therefore, you should set procedure in selecting investment policy as follows:

        
  1. Prepare fund profile

               You should prepare fund profile which contains at least the topics below:

               1.1  Fund type : single fund or pooled fund

               1.2  Member information : classified by age, turnover ratio, type of employment (hourly, daily, temporary, permanent employment)

          
2. Asset management company propose suitable investment policy

               2.1 Consider the suitable investment policy

                         For example, you may concern the majority of member. If they are at 50-60 year old, the proper investment policy would be short-term fixed income fund and have low risk in order to maintain the principle. However, if they are still young, the proper one would be equity fund. Since member has more time to retire, they would concern to get high return though it has high risk.

               2.2 Consider the diversification

                         You should consider if your fund has proper asset allocation. It should not invest heavily in any asset to avoid risk of the overall portfolio. Moreover, your fund should have liquidity for payment to resigned and retired member. You should specify the asset allocation in the contract which you could use it to monitor the fund investment.

               2.3 Consider the investment limitation

                         The investment limitation could be in accordance with fund governing rule and laws.

        
  3. Identify benchmark for the fund

                You should make an agreement with your  fund manager to identify an appropriate benchmark and use it as a tool to assess your fund manager's ability to manage portfolio of the fund. The appropriate benchmark should be in line with investment policy. In case where the provident fund invests in more than one type of asset, the appropriate benchmark must be a composite benchmark which is weighted by benchmarks corresponding to asset allocation policy.
 

Types of assets

Benchmarks

1. Equity

   SET Index Return  or
   SET 50 Index Return

2. Fixed Income
    2.1 Government bonds

 
 
ThaiBMA Zero Rate Return “ZRR” Government BondIndex which maturity is equal to target duration of portfolio  or
  Total Return of ThaiBMA Government Bond Index  in case where target duration of portfolio is not stipulated

    2.2 General bonds
          (government bonds + corporate bonds)

   ThaiBMA Zero Rate Return “ZRR”  Government Bond Index which maturity is equal to target duration of portfolio  or
   
Total Return of ThaiBMA Composite Bond Index in case where target duration of portfolio is not stipulated

3. Fixed deposit

    Average 1-year fixed deposit interest rate which provident funds shall obtain from BBL, KBANK, SCB and KTB for principal equal to 1 milllion bahts.

3

 Monitoring the fund performance


          Typically, past performance doesn't guarantee for the future performance. However, performance is one factor that can reflect the efficiency of the asset management company (the company). Therefore, fund committee should  monitor the fund perfomance from the guideline below.


          
1. Investment policy should be done as commitment

              1.1 Consider the investment policy
                        You should investigate the operation of the a company as follows:
                        (a) According to the investment policy, is there any violated investment assets or violated ratio? For what reasons?
                        (b)  Is the portfolio diversification suitable for the fund?
                        (c)  Is the risk adjusted return suitable for the the fund?
                        (d)  What is quality of the investment assets?

              1.2 Compare the fund performance with benchmark
                        You may explore the benchmark that is suitable for each investment policy. For example, the benchmark for equity is SET index return or SET 50 index return. The benchmark for fixed income is ThaiBMA bond index return. However, if the provident fund invests in more than one type of asset, the appropriate benchmark must be a composite benchmark which is weighted by benchmarks corresponding to asset allocation policy.

                        Sources of benchmark information as follows:.
                          
Stock Exchange of Thailand (for SET Index Return and SET 50 Index Return)
                          
Thai Bond Market Association (for ThaiBMA Zero Rate Return "ZRR" Government Bond Index, Total Return of ThaiBMA Composite Bond Index and Total Return of ThaiBMA Government Bond Index)
                          
Bangkok Bank Plc., Kasikorn Bank Plc., Krung Thai Bank Plc.,and Siam Commercial Bank Plc. (for 1-year fixed deposit interest rate for provident fund)

              1.3 Compare the fund performance with others
                        a) Compare with other funds having the same investment policy : You may ask other people for the performance of their fund and compare it with yours. For example,

Table of comparing fund performance
under management of Company A, B, C
Investment Policy : Mixed Fund

Asset Management Company

NAV per unit (baht)

Change (%)

 

Year 2001

Year 2002

 

Company A

10

10.65

6.5%

Company B

10

10.55

5.5%

Company C

10

10.75

7.5%

Remark : If Company B manages your fund, he should explain about the return showing the lowest rate. Then, you should analyse if it resulted from the company capability or the investment constraints, and find out the solution.

                        b) Compare with other funds having different investment policy : It could be funds managed under the same company or other companies. The result would lead to modify the investment policy in the future. For example,

Table of comparing fund performance
under management of Company A

Investment Policy

NAV per unit (baht)

Change (%)

 

Year 2001

Year 2002

 

Conservative Fund

10

10.30

3%

Mixed Fund

10

10.50

5%

Equity Fund

10

11.00

10%


 Remark : In order to modify the investment polciy, you should consider the higher return related to the higher risk.

              1.4 Declare the penalty for violating the investment policy
                       If you monitor the investment in 1.1 and find any mistake, you should take action in each situation as follows: 
                        a) Investment asset is beyond the investment policy
                              The company must notify you with reasons and appropriate solutions. Then, you should consider if this transaction should be continued. Furthermore, you should look into the penalty identified in the contract and follow the process to get compensation from this damage. 
                        b) Investment ratio is over limit without any incremental investment
                              The regulation requires the company to notify fund committee within 3 days. Then, you should consider if this transaction should be continued. If the reason is from the NAV reduction due to paying to resigned member, you should let it be. 
                        c) Investment ratio is over limit by incremental investment
                             (1) Investment limit violates the regulation
                                   The regulation requires the company to rectify the ratio within 3 days. If the company must notify the SEC if it can't do it.
                             (2) Investment limit violates the invesment policy
                                   The company must notify you with reasons and appropriate solutions. Then, you should consider if this transaction should be continued. Furthermore, you should look into the penalty identified in the contract and follow the process to get compensation from this damage.

         
 2. Monitor the asset calculation

                Principally, the asset management company must calculate the daily asset value using the mark-to-market method according to the notice of the Association of Investment Management Companies. Using any other appropriate calculation methods is possible depending on the approval of the fund committee.

                For example, the portfolio holding a debenture, which the issuer announced to stop paying interest for 5 years and has no bid/offer price from market makers, would have no good reference for the market price. The asset management company could find a new market price and report to the fund committee for approval. Pricing assets at higher value would result in disadvantage of the new member entering the fund. On the contrary, lower asset price calculation would lessen the withdrawal amount of the existing fund members. 

                Moreover, you should check the calculation method if it goes along with the notice of the Association of Investment Management Companies. You may also have the asset management company propose the valuation of non-marketable securities. Though the company may have an additional charge on this service. However, the auditor will examine the asset valuation of the fund at least once a year. 

 

 


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