Winter 2013

INSIDE VIEW: Almost reality

Hong KongAfter years of waiting for an Asian equivalent of the successful Ucits platform for funds in Europe, not one but three possible versions have come along in 2013. Stewart Aldcroft of Citi Transaction Services explores the possibilities of mutual recognition, fund passporting, or both.

Three possible rivals for Europe’s Ucits are giving global and local fund managers much to think about.

Alexa Lam, the deputy chief executive officer of the Hong Kong Securities and Futures Commission confirmed in January that she was in negotiations with the China Securities Regulatory Commission.

Under the mutual recognition scheme, mutual funds and unit trusts that had been authorised and domiciled in either China or Hong Kong, respectively, could be sold in the other’s jurisdiction.

In September, the finance ministers of the member states of the Asia Pacific Economic Cooperation – Australia, South Korea, Singapore and New Zealand – signed a proposed Asia Region Funds Passport Agreement in Indonesia.  

A month later, the securities market regulators of Singapore, Malaysia and Thailand signed a memorandum of understanding at the Asean Capital Markets Forum in Bangkok. They agreed on terms for the cross-border offering of collective investment schemes in their three countries.  

For most of the past two decades or so, the key markets for offshore funds and cross-border selling in Hong Kong, Taiwan and Singapore have had an open-door policy to enable the sale of Ucits domiciled in Luxembourg and Dublin, alongside domestic funds.

In Taiwan, offshore funds represent more than 60% market share of fund sales, whereas in Hong Kong and Singapore it is close to 95%.

While there has been a strong inflow of assets for management in these locations, usually by the local offices of global fund managers, development of a local fund management industry has become stunted.

Policymakers in Asia have sought ways in which they can boost their domestic capabilities and are exploring the concepts of recognition and passporting.

Asia has shown significant economic growth over the past decade and it is forecast that the collective wealth of the region will exceed that of North America within the next couple of years.

Asia has not only become the manufacturing engine of the world, but also the place where private banks and other wealth managers, together with attendant fund management businesses, have seen most opportunity to grow their businesses.

The Taiwan mutual fund management business, for example, at around $200 billion in size, is approximately equal to the size of Hong Kong and Singapore combined.

China, which only started a mutual fund industry less than 15 years ago and now has more than $400 billion in assets under management, has more than 100 times the number of fund investors than are in Hong Kong.

Thailand, Indonesia and the Philippines each have rapidly growing, young and increasingly economically independent populations, larger than the size of Germany.

The average regional savings rate, the need to self-provide for retirement, and many other factors all mean a significant growth potential for the asset management industry, and everyone wants a part of that.

The mutual recognition scheme between Hong Kong and China looks set to be the first to actually be up and running. Most likely this will be a pilot scheme, a term and style China uses when starting off something new in the financial services industry. Initially, a few fund houses with qualifying products probably will be allowed to start to sell cross-border.

One of the key issues is that global fund managers have no local branding in China – they are unknown to local investors, and few have any kind of local representation.

Distribution will be key to success. In China, distribution is dominated by five large banks. There are few others yet to emerge with any meaningful market share. How will it be possible to get onto the banks’ platforms?

Many asset managers have only created funds that invest into the Chinese stock and fixed income markets. The past five years, however, have seen consistently losses from Chinese equities. And the fixed income market looks well past its peak.

China may start to open up further, possibly within the first year of starting the recognition scheme. Soon after that, Taiwan might be able to join. Taiwan joining would make a significant difference to the potential, given Taiwan’s familiarity with international investing. What will not happen, despite some reports otherwise, is the inclusion of Ucits products in the mutual fund recognition scheme of Hong Kong and China.

The Asia Pacific passport is not scheduled to start before 2016, which, by any stretch of the imagination, is a long way off. Presently, both Australia and South Korea adopt internal tax policies that make the holding of non-domestic mutual funds punitive.

While both have a well-established, large domestic fund management industry, it will be hard to export their fund products to other markets if they continue to penalise those wishing to enter their markets. Further thought will be needed to make that work.

The passport developed by the Association of Southeast Asian Nations (Asean) is scheduled to start in 2014, and as it is limited to just three locations. Those are Singapore, Malaysia and Thailand, and they have a history of co-operating with each other.

This passport has a reasonable chance of getting some success, although, for the moment, the global titans of the fund management business will likely not qualify to participate.

It has already issued proposed terms under its Standards of Qualifying Collective Investment Schemes, which indicates fund managers will need a minimum of five years’ history, and $500 million in assets under management to be allowed to qualify for the passport.

Most likely, the recognition scheme between Hong Kong and China will start first, and has the potential to become the most successful of the three.

The Asean scheme has a reasonable chance of success, given the past level of cooperation between these participants. But only time will tell whether any of them will achieve the success of Ucits.

Stewart Aldcroft is a senior adviser, Asian fund management industry, at Citi Securities & Fund Services

©2013 funds global asia

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