Our panel discussed why the Singapore Variable Capital Company makes them bullish, what gives the onshore jurisdiction an offshore feel and “blood on the streets” from China’s slowdown. Chaired by Romil Patel in Singapore.
(founder and chief executive officer, Gordian Capital)Anshuman Asthana
(Regional head, securities services product management, Standard Chartered)Udit Gambhir
(managing director, funds – Asia, SGG Group)Praveen Jagwani
(chief executive officer, UTI International)Martin O’Regan
(managing director of Solas Fiduciary Services and chairman, Singapore Fund Administrators Association)
Funds Global – How do you feel Singapore is placed as a financial hub and which Asian countries will be the most important for cross-border fund distribution in 2019?
Udit Gambhir, SGG Group –
Singapore is very well placed. In fact, what is happening in the world and the news that we are seeing globally, the global financial centres have taken a beating. Most of the offshore centres certainly have some kind of fictitious or fallacious name attached to it unnecessarily.
Singapore, being a country which is not considered offshore as a jurisdiction, tends to be much better than the rest. In terms of Asian countries that would benefit in 2019 in terms of distribution, I would say none. We are a bit far away from that to actually come – it still has not taken off because of the different tax laws, currency controls and capital controls that exist. Distribution is hard and with more nationalistic governments across the board, it remains to be seen how that goes.
Anshuman Asthana, Standard Chartered –
Singapore is by far the largest offshore banking centre. By definition there is a lot of capital here and there is currently a big need for capital in all Asian markets. India has massive infrastructure needs, so does Indonesia, Thailand and Vietnam. One area where we see a lot of activity is the Singapore-India corridor. There have been a lot of stressed assets in India over the last few years and a number of asset management companies are setting up funds with investors in Singapore to invest into those assets. That is one area where I see a lot of growth in 2019.
Martin O’Regan, Solas Fiduciary Services –
As an Asian financial hub, Singapore is probably ahead of the rest of these centres, but as a global financial hub, that will take some time. In Asia I do feel that Singapore is more prominent than the rest now and that is due to a number of reasons: the connectivity across government institutions, ease of doing business, the ecosystem of talent and service providers on the ground and its tax treaty network all lead to a very credible jurisdiction. If you look at the statistics for distribution, particularly for Ucits, there is a huge difference between Singapore and other countries in Asia.
Singapore is second in numbers of Ucits subscriptions outside of Europe.
Mark Voumard, Gordian Capital –
Singapore established itself as an Asian asset management centre over the last decade, clearly. We have seen tremendous growth not only in alternatives, but also long-only strategies, which jumped by 23% last year in terms of assets under management (AuM).
In terms of the Asian countries that may be interesting for distribution, Thailand stands out. After decades of mostly domestic investments, the regulator has opened up the market, increasing the upper limit for overseas foreign investments from $75 billion to $100 billion. That has really encouraged global funds and global firms to set up in Thailand and distribute locally. When it comes to the high-net-worth market, qualified Thai investors are being allowed to invest directly offshore, so there is now a stampede by all the private banks into Thailand. As such, it is currently probably the most interesting market in Asia.
Japan has seen a tremendous boom in asset managers coming to the country – primarily in the private equity and venture capital, real estate, private credit and hedge fund space. They are seeking to market their funds to Japanese institutions and pension funds and have been winning quite a few allocations – especially over the last 18 months. Also of note has been a big pick-up in interest from global mutual funds coming to Japan in order to crack the retail market, and our sister company, Japan’s leading independent fund placement agent, has been very active.
South Korea is also a big story in Asia, with huge allocations by Korean pension funds and institutional investors. This is primarily into real estate, but they are starting to look at private equity. On the flipside, the retail market is very domestic and there is very little investment in offshore vehicles and/or assets.
Praveen Jagwani, UTI International –
What makes Singapore stand out is the comprehensive and cohesive manner in which various players come together. This would include the Monetary Authority of Singapore (MAS), the Singapore Exchange, Inland Revenue Authority of Singapore and the industry bodies, such as the Investment Management Association of Singapore (IMAS). They all work together to take a concept and bring it to fruition as a law in a short span of time. This is unprecedented.
The fact that Singapore is located at the intersection of the two fastest-growing dollar millionaire segments in the world – China and India – makes it uniquely positioned to capture those flows. The fact that it is seen as reasonably independent vis-à-vis Hong Kong has clearly given Singapore an advantage. The MAS is seen as cutting-edge of all that is new in terms of governance, in terms of fintech – it was the first central bank to have a chief fintech officer..
Funds Global – What capabilities can Singapore and the region provide for investors and what are the challenges?
Singapore is about location, location, location. It is very strategically located, making it the right place when it comes to running trade flows and this drove Singapore to where it is today. There are also capital flows now that are flowing through Singapore.
Looking at it in comparison to other jurisdictions, Singapore does not compare to offshore islands, be it Mauritius, the Cayman Islands or the British Virgin Islands. It is an onshore jurisdiction with an offshore feel, which not only helps put up regulations and laws to set structures or fund/investment managers up, it also is one of the few jurisdictions where you have the ability to set up pooling vehicles, and that is going to get even more solidified with the Variable Capital Company (VCC) once it comes in.
In terms of challenges, if the Europeans cannot get their act together even after being in the EU for so long, we cannot force the Asians to try to get anything done because they have always been so divided in culture, so distinct, and with completely different tax codes, regulations, currencies, laws, sometimes religions. That has to be the biggest challenge in being able to look at anything collectively. There are two big elections coming up this year: Indonesia and India. If there is a shift, then Asia goes back through another change cycle and that is significant because these are two leading economies for capital in the region.
Singapore is clearly rated as the number-one politically stable country in Asia and provides a highly pro-business environment. It also acts as a magnet for money and traditionally, if you look on the private banking side, India, China and Indonesia have supplied a lot of that money to the private banking side.
It is also a full member of the Organisation for Economic Co-operation and Development (OECD) and the Financial Action Task Force (FATF). It has low business and personal tax rates but it is not a zero-tax jurisdiction, there are tax incentives for Singapore-domiciled funds. Even before the VCC is launched, it has 82 double-taxation agreements and the most extensive network of free-trade agreements in Asia. The MAS is seen as the gold standard for regulators in Asia.
The Asian Development Bank estimates that developing economies in Asia will need $26 trillion of US infrastructure projects until 2030, or $1.7 trillion per year. Currently about $880 billion is being allocated to that. The Singapore government has announced a new government agency, ‘Infrastructure Asia’, which been established to spur growth in this space. They are pushing the concept of bankability, in other words the rule of law and confidence that global and regional investors have in Singapore to make it a hub for infrastructure fund manufacturing and management.
There are challenges across Asia on a more micro level in terms of targeting retail investors. The lack of financial education is one issue in developing economies. The first priorities are healthcare and education. If you do invest, it is probably going to be a fixed income instrument or a fixed deposit in a bank and then you will probably buy single stocks, with diversification into funds coming at a later stage. It is going to take time and education for retail investors in Asia to really start significantly investing in funds.
Funds Global – Rising nationalist sentiment is a theme not only in Asia, but also around the world. Will that disrupt the infrastructure target?
No, certain countries in Asia that have been recalcitrant are opening up to infrastructure, because even with a strong man in charge, infrastructure is a requirement and they realise this. Take China, where the president has basically made himself president for life. Infrastructure will still be rolled out regardless of these issues, especially with the World Bank involved.
It is a globally recognised theme that when it comes to infrastructure, a lot of the local companies do not have the expertise to execute projects. Almost all the countries across the region have realised they will have some dependency on multilateral organisations or on different kinds of credit or capital that will help them. How they go about attracting it is different. A case in point would be India where, again, it is an open economy, so foreign direct investment (FDI) can come in. But with a government with nationalistic sentiments, they have pushed through the regime of alternative investment funds (AIFs), so they are giving local people the opportunity to run funds which can raise capital from overseas as well as locally. The idea is to get a mix, and what has happened over the last year in India is a big outflow of capital from foreign investors. It is a net outflow from overseas investors, but Indian retail mutual funds are driving the markets.
People are really looking forward to the Asian Infrastructure Investment Bank (AIIB) – there are a lot of expectations from the institution going forward.
In Vietnam there are heavy infrastructure needs, a very nationalistic government and a contained economy. When the government started infrastructure initiatives, most were multilateral projects funded by the World Bank or Japan. But in the last two or three years, massive funds have been set up, domestic as well as offshore, who are funding a number of these projects. Most fund managers in Vietnam are providing returns in a different range altogether from their European counterparts, and primarily because all these funds are funding local infrastructure growth, real estate and manufacturing. There is a nationalistic government, but it is happy to open up the market to address infrastructure requirements and, in turn, growth in the market.
Inflation numbers have also stabilised in Asia, which is actually having a similar effect on currency and the exchange rates too. That is another facet which is helping Asia move to the next level and people do know the next level of growth globally is going to be driven from here and nowhere else.
Funds Global – Vietnam is an interesting example of a communist country embracing capitalist policies to drive growth and change. What is in store for it going forward?
Asthana – Vietnam has been doing it for quite a few years but it has been more visible over the last 18-20 months and there are a lot of asset managers opening up shops locally. We have a number of clients to whom we provide services, and we see the outstanding results that they have been getting. What is happening now is a number of fund managers from around the world and a number of private equity funds are putting in their money for Vietnam. How sustainable that is and how deep that market is remains to be seen. It is not a huge market and the stock exchange is very small.
With China slowing down, there is going to be a fair amount of blood on the streets in this region as this year wears on. The absolute amount of money that Vietnam can absorb as a country is still reasonably small. For a country like that to set up the entire ecosystem of fund management with administrators, custodians and high-quality auditors is difficult. Every country in the region has its own ambition to set up an asset management industry per se, proceeding on from a thriving stock market and bond market, but Singapore has the advantage of having been around for long time as well as having established its credentials.
If a European or US manager wants to capture Asian flows and set up a business here, no other country will offer a comprehensive societal experience like Singapore. If you want to move an Asian headquarters with analysts and operational personnel, Singapore is the only one that can absorb that kind of volume and provide high-quality housing, entertainment, schools, healthcare and the entire societal construct as a base, to really capture the region. If you want to go to Sri Lanka, if you want to set up something for Myanmar, or Cambodia, or Vietnam indeed, Singapore offers a base and that is what sets it apart. The challenge is that it is an island and it can grow this much and then no more, so it will always be fighting against nationalistic fervour of all these countries wanting to set up their own industries and have their own talent pools and therefore create employment locally, which is why the passporting here has been held hostage.
Funds Global – What impact do you expect the VCC to have on the growing fund management industry in 2019? Do you think the city state, being Singapore, can compete with the likes of Dublin, Luxembourg and the Cayman Islands?
I am very bullish. There is a lot to be said about the hedge fund industry as such, but the VCC is not only being set up to cater for the hedge fund industry. It is also being done to set up a reputable umbrella, Ucit type of structure. The capital control Singapore has is on the fee flows that come in to the managers. The flows that are going through funds do not necessarily go through Singapore; they are not here unless you put the banking channel there. But that control, if they can establish it, is good regulation to begin with.
The next step is mutual recognition, which will drive the industry substantially. It will push people to actually set up shop in Singapore, because that is where the structure is going to be with regulations, regimes, effective management control and where you are sitting. With all of that coming into place globally, it makes sense for the structure to also be Singapore, and that is what they are trying to push for. It is going to be an alternative play to begin with and eventually, when the structure is time-tested, mutual funds will jump on the bandwagon as it is high-risk and they will never be the first ones to try these structures, which the ordinary asset class would do.
Yes, absolutely. The VCC is going to be a game-changer, and we have been working with both PwC and the MAS to promote Singapore as a destination for fund management. Singapore and MAS have done quite a lot of work in comparison to Hong Kong, which is still a consultation paper. Australia also is still trying to figure out how they are going to put this together. Singapore has been much faster and methodical. It is going to be a game-changer for sure with so much wealth sitting here. Outside of Europe, Singapore is the second-largest subscriber to Ucits funds and the largest offshore banking centre. Naturally, VCC funds can be very easily manufactured and opened here. Although there is really a need for more fund manufacturing talent, but a lot of it is available on the ground which can be repurposed in this area.
Singapore really did not have a comprehensive onshore vehicle, they had LP, LTD and unit trusts and none really worked efficiently for a fund. It was also good timing with this sentiment, there was no real structure here that people could use unilaterally and people made Singapore vehicles work depending what they were trying to do, so this will help fix that problem, which is a good thing.
We have all been involved with either the regulator or industry bodies or associations on VCC, and everyone is very bullish about the structure. It now gives people an option that was not there before to come onshore. Not that there was not an option, but a viable option to go onshore. It is agnostic to the portfolio, so you can put any asset class in there and we are all looking forward to it. It will take some time and we are not sure how much it is going to cost – there is a lot of nitty-gritty to be done, but from a high-level perspective it is very positive.
Retail or distribution should not be the key factor in measuring the success of the VCC. Initially it is primarily going to be used by big institutional investors, hedge funds and private equity.
There are two facets when looking at vehicles or Collective Investment Schemes (CIS). One facet is the investor and the other is the investments. Since we are talking about Asia being the flavour of choice and flows coming to the region, it will only make sense for there to be a vehicle that exists in Asia to actually capture those flows and then invest them further on. Otherwise you are looking at structures which have further holding companies in Singapore or in Hong Kong.
We are very positive on the VCC. With 66% of Singapore fund AuM invested in Asian assets, surely it makes sense to domicile a fund entity within the region. I believe what will happen is that initially the VCC will be used by asset managers in Singapore that are here and well established. It will be adopted by Asian investors who are very comfortable and familiar with Singapore. I think it will be a bit of a struggle with the EU because Luxembourg and Dublin are already there. US investors, who are quite pragmatic, will become accustomed to it over time. All of this will take time, but once established, we are confident it will enable the jurisdiction to become Asia’s dominant alternative fund domicile hub.
Funds Global – Are you going to convert all your funds to VCC?
Not in a hurry. There is a long flight path, so there is no immediate challenge to any of the established mechanisms. If you want a foreign fund to be registered with the central bank in Thailand, the process is cumbersome unless it is a Ucits fund. For a Singapore VCC to gain acceptance in the neighbourhood, let alone Europe and the US, it is going to take a long time to achieve critical mass and go through all the teething problems – this is a multi-year process. I do think some early successes might come at the expense of Cayman, because having an umbrella structure SPC [a segregated portfolio company] is very useful. We certainly see a lot of use for that in Singapore, although with the India corridor specifics, there is lots of devil in the detail in terms of taxation. But this is a multi-year process and definitely a great start.
Funds Global – With new regulation planned for Singapore – the individual accountability and the opt in/opt out and the impact of global regulation – what concerns you the most?
For the first time in six or seven years, we are actually fairly relaxed. We have until April this year to roll out opt in/opt out. It needs to be handled professionally, of course, however it is just paperwork. It is going back to your accredited investors and giving them an option to be treated as a retail investor or as a professional investor and that is quite straightforward. This year for the first time on the regulatory side, there is nothing major looming and there is no foreseeable cyber-security regulation in Singapore.
In my view, the big one for 2019 is substance requirements in each location – especially if you are tax structuring on a global basis, as there were various incentives for doing that. There is the extra cost but also the question of what it actually means. Again, this moves towards the sentiment of going onshore again. All these new substance requirements began hitting my clients at the start of 2019. The big questions are around what substance is, what it means and how to proceed.
If you look at the OECD, Beps [base erosion and profit shifting], Beps VI and the principal purpose test, that is reasonably clear about the fact you have to have senior management in the particular location and so on.
In Luxembourg, for example, there are 300 managers or so and tens of thousands of funds. In Singapore there are 700-plus managers and 2,000 to 3,000 Singapore-domiciled funds. That will grow with the VCC, but the point is that there is real substance here, with physical operations and staff located in this jurisdiction versus just a letterbox regime. It is a family-friendly, green, clean environment where fund managers actually want to live.
Funds Global – What are you keeping your eyes on in terms of challenges?
Brexit is the big one from a business perspective in terms of what it does for us and how we set up in Europe. Do we need a non-London presence? If so, where?
Given that we are in late economic cycle now, growth is scarce and as active managers we should ideally have seen more flow. However, a scared investing world is moving towards passive in a very big way; the whole active/passive divide is what we are keeping an eye on. Then there is rapidly shrinking dollar liquidity to contend with, followed by the potential of volatility induced by the algorithmic traders. We have seen some flash crashes as a result, but will that intensify?
I am concerned about the looming uncertainty this year – trade wars, Brexit and the like. Overall I do not have a very sanguine view.
I think we will see a global slowdown this year that is starting to be factored into share prices. Previously I was more bullish due to synchronised global growth. Looking ahead, the EU and US will falter, with Asia doing better on a relative basis. A real and sustained slowdown in China, for whatever reason, is the wildcard.
The US-China trade war has huge repercussions, not only in China but also on the region. From a short-term perspective, it might lead to incremental flows of trade or exports from the other economies, but from a long-term perspective, the flow of income to those economies will fall and that will have an impact on the prosperity of people. Likewise, it is going to have a similar impact on demand in the US because costs will go up and that will have a global impact in terms of trade.
The other key thing I would like to see is the trade flows, the capital flows for Asia. We have been in a boom year for the last three to five years when it comes to private capital for Asia, we raised at least $50 billion, but the deployment rate has not been there. We are looking at a 2019 where stagnation has set in, there are not that many deals and as a result, until the capital is deployed, any new structures and raising of new capital will have a longer cycle for deployment. That is the biggest hurdle in terms of deployment of capital because there are no deals – it has flatlined.
Funds Global – Are you optimistic or pessimistic for the asset management industry in Singapore, and indeed in Asia, this year?
I am optimistic on Singapore. I am neutral on Asia right now, given its direction of travel –there are too many variables, elections being one, regulations being a second, substance questions from India especially being third and China capital controls being fourth.
I will put my money on Singapore. I am hopeful about Thailand with its further opening up and allowing offshore investments to a large extent. Vietnam should continue with its runaway story. Other markets depend on which way things turn out, particularly Indonesia and India. I do not expect a seismic shift in Indonesia, but then again, the will of the people is not written by financial institutions.
I think demographics will support longer-term allocations to funds by retail investors. We are seeing more Asian institutions starting to invest cross-border, both regionally and globally. Cerulli, the research and consulting firm, predicts that institutional investors in Asia will outsource 18% of their assets by 2021, an increase of almost 4% compared to 2016 and 7% in 2012. While that does not sound like a high percentage, the numbers are huge. UBS’s family office group expects about a third of the wealth of high-net-worth families in Asia to change hands in the next five years. McKinsey expects Asia’s asset management industry revenue pool of $66 billion to reach $112 billion in the next five years and it is the fastest-growing asset management region in the world. Despite some headwinds, there are some very strong growth estimates for the industry and Singapore is well positioned to take advantage of these trends.
We are coming off the back of ten good years and that is hard to beat. But most boards today expect that run rate to continue, and that is a pipe dream. I am cautiously optimistic for 2019 and the industry will certainly do well – it may not be the asset managers per se, but all the players in the industry will certainly get greater revenues, even though there is pressure on compensation, particularly from the UK, so salaries are not keeping pace for the industry.
We see Singapore as being the main benefactor. We see flows coming from various jurisdictions, the US in particular, and many people are looking at doubling their exposure to Asia in the next 24 months.
I am more optimistic than pessimistic. We are now way overdue for a correction and cheap capital is no longer cheap. The opportunity cost is now more significant than it has been in the last ten years. Having said that, there is a lot to be desired in emerging parts of the world and that will continue, especially keeping in mind that those markets are where a great deal of consumption is and where it needs to go. It is an automatic flow, and people are getting value, so I am optimistic.
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