Why UCITS providers are concerned by Asian Funds Passports
Asian markets, in particular Hong Kong, Singapore and Taiwan, have proven to be very fruitful locations for providers of Undertakings for Collective Investment in Transferable Securities (UCITS) products to seek distribution of their funds. Currently Asia represents more than US$200bn in AUM (approximately), over 5% of the total in UCITS funds.
Observers of the Asian fund management industry will be aware that in the last few years three “Funds Passport” schemes have been created as follows:
1. Hong Kong China Mutual Recognition for Funds (MRF) – launched from 1 July 2015
2. ASEAN Collective Investment Schemes (Singapore, Malaysia and Thailand) – launched from 22 August 2014.
3. APEC Asian Regional Funds Passport (ARFP) (Australia, New Zealand, South Korea, Singapore) – due to launch in 1H2016.
The startling success of UCITS globally has stimulated the “traditional Asian response” of seeking to create so-called “copycat” products, although a more serious view is that with so much money being raised for investment in Asia these days, governments in the region are keen to keep as much of that as possible to be managed and invested in the region as well, thus creating jobs, value-added services and greater employment opportunities.
Initially, while the exact details of each of the “Passport” schemes were unknown, some had predicted that UCITS would be able to participate in some form, however now that two of the three schemes are up and running, it has become very clear there is no room for UCITS products in either of them.
Should this therefore be regarded as a threat to the role and growth of UCITS in the Asian region?
Potentially, yes of course it will be a threat. It is clear that there is considerable effort being made by Asian regulators and governments to keep more money in Asia for investment and management. But in reality, certainly in the near future, it is unlikely to have much impact, as UCITS have successfully dominated the non-domestic investment space throughout the region. Thus for investors seeking to make money from US, European, Japanese, Global or Regional Equity or Fixed Income Funds, there are no equivalent products offered at local levels that will be able to participate in any of the three passporting schemes.
For as long as global investing remains a positive for both investment advisers and their clients, clearly the UCITS product will continue to dominate distribution.
Longer term, a major objective of the passporting schemes is to bring to the Asian region both fund managers and their investment professionals, that can manage assets invested in global markets. This will take time, and certainly won’t happen in the short term, as most fund management organisations are unlikely to commit the type of resources necessary to enable this to happen. But there is already an infrastructure in place to accommodate this, as all the world’s leading investment banks and brokers have a presence in the Asian markets.
So what can UCITS providers do now to protect their business?
Across the three main markets of Hong Kong, Singapore and Taiwan there are now more than 4,500 registrations (PwC GFD) of UCITS funds, although many will be duplicated, thus in effect it is probable that around 1,200 separate funds are offered and authorized within the region. There are approximately 100 international fund managers offering their products across the region too. The most successful of these operate in at least two of the three key markets. Increasingly, as managers build their business in the region, they also recognize the need to install investment analysts (first) then build out a team of investment professionals, initially to focus on local stocks and funds for the Asian markets.
UCITS providers are familiar with the concept of domiciling funds in one location and managing, marketing and supporting funds from other locations. With the advent of “Fund Passports” within Asia, they may find it necessary to extend their existing business model to incorporate this type of set up. As a result, they will be better able to capture and retain assets across their product range, albeit, their UCITS products might not prove as popular if replicated elsewhere.
Will UCITS be allowed to participate in “Asian passporting” schemes in the future?
Most observers in Asia believe there is little or no prospect of direct access to UCITS being allowed within any of the three funds Passport schemes. The only viable potential, which may get introduced in subsequent phases or amendments to the existing Passporting regulations, is for the inclusion of fund of funds or feeder products. This is already allowed in Chapter 8 of the Hong Kong SFC Guidelines on Mutual Funds that can be authorized in Hong Kong for distribution, but currently excluded from the MRF Guidelines. These may still need a HK-based allocation manager, and are unlikely to be included during the first two years or more of MRF, as the scheme gets settled in.
Elsewhere in Asia, both Malaysia and Thailand have similar schemes to allow the approval of locally domiciled funds to operate as feeder or fund of funds, where they use third party products such as UCITS. Indeed in both those markets, these have, to date, proven to be more successful and popular than anything under the ASEAN Passport scheme.
Are UCITS “safe” from competition for the moment?
Yes, but there is clearly a determination on the part of governments in the Asian region to bring back to their jurisdictions the assets of these funds for management. This may not have much impact short term, but within 3 to 5 years there could be significant changes. Nevertheless, the providers of UCITS products may also be those establishing locally-domiciled funds within Asia to be “Passported” throughout the Region, so ultimately the fund houses might still benefit, it will just be another part of their businesses.
Stewart Aldcroft, Senior Advisor I Asian Fund Management Industry, Managing Director I Citi Securities & Fund Services and Chairman I CitiTrust Limited