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Broadening Asia's investment horizons
Broadening Asia's investment horizons
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Broadening Asia's investment horizons

19/09/2017

One of Asia Pacific’s most ambitious mutual market access schemes is due to go live at the end of 2017

The Asia Region Funds Passport (ARFP) will launch with five countries creating a combined market of over $3 trillion and becoming the first scheme to cover all compass points of the Asia Pacific region.

At an exclusive roundtable event hosted by BNP Paribas Securities Services, guests including a senior official from the Australian Treasury, discussed how to ensure ARFP is a commercial success and whether it has the potential to challenge the dominance of UCITS.

Five countries preparing for launch

It has been four years in the making but ARFP is on track to be up and running by December. Originally proposed by the Australian Financial Centre Forum in 2010, the first iteration will see Australia, Japan, Korea, New Zealand and Thailand open their mutual fund markets to each other, allowing an asset manager in one country to ‘passport’ its funds into the other participating economies. Countries that could join at later stages include India, Philippines and Singapore.

The benefits are clear: more choice for investors, a bigger marketplace for fund managers while coordinated oversight of cross-border funds by regulators should improve consumer protection and market stability.

However, there’s still plenty of work to be done. ARFP regulators are discussing how host country laws will apply to incoming funds and are accepting submissions until September 19. Other outstanding issues include tax treatment and fund structure.

Learning the lessons of the past

ARFP is not the first retail-targeted mutual market access scheme to originate in Asia. The ASEAN Collective Investment Scheme (ASEAN CIS) was officially launched in August 2014 between Singapore, Malaysia and Thailand. So far it has struggled to gain traction with only 11 funds live as of August 2017.

Meanwhile, Hong Kong and China launched their Mutual Recognition of Funds (HK-China MRF) programme in July 2015 to sell compliant funds into each other’s markets. The programme is being hurt by a lopsided approval process. Northbound approvals (Hong Kong funds to be sold in China) are taking 12-18 months with just eight funds accepted for sale on the mainland as of August 2017. In contrast, 50 Chinese funds have received approval from Hong Kong’s Securities and Futures Commission .

Part of the problem is that the regulations often have not fully considered the operational mechanism of selling a fund. Minute operational details such as the differences in standards for fund subscription cooling off period between markets can deter a local distributor from working with a cross-border fund.

The progress made by the ASEAN CIS and HK-China MRF provides relevant lessons for ARFP and the ARFP Joint Committee is closely monitoring their development to design a commercially viable ARFP scheme.

Asset managers are also recognising they need to consider the commercial aspects of fund passporting before they decide to participate.

“One of the things we look at is our own capacity. If I pick Hong Kong as a domicile, can I passport funds to other economies from there? Can I find an edge in this market? And choosing the right partner is important. Is there someone on the ground to help us?” said Jessie Lam, Chief Operating Officer at Oceanwide Asset Management. 

Realising Asia’s potential

Despite the setbacks to previous schemes the industry is still keen to push ahead with ARFP and it’s no wonder. Growth potential in the Asian funds industry is huge. Assets under management in Asia have been doubling in recent years reflecting the rise in average total household wealth, according to research by BNP Paribas Securities Services and Cerulli Associates. And across the five ARFP economies, the combined mutual fund market size is expected to jump another 65% to USD 3.1 trillion by 2022 as the scheme encourages investors to switch from other securities into funds, and from domestic funds into passported products.

“In Australia, employers have to make a compulsory contribution to a Superannuation fund that is equivalent to 9.5% of a worker’s wage so the growth is tremendous,” said Jenni Kang-Stahmer, Hong Kong-based Investment Director at the Australian Trade and Investment Commission.

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In terms of the benefits for participating countries, each has its own characteristics, according to Ken Yap, Managing Director, Asia at Cerulli Associates.

“Australian-domiciled products cover a broad selection of strategies so there is a strong opportunity to export funds, for example. While in Japan, mutual fund penetration is only 4% but it has the highest exposure to foreign assets at 30%, so it looks like a promising market to sell into.”

UCITS ubiquity

Even if ARFP can reconcile some of the issues that have plagued previous schemes, there remains a question about whether it will be able to dethrone UCITS from its dominant position. UCITS (Undertakings for Collective Investments in Transferable Securities) are a European fund wrapper that is globally recognised as the gold standard for cross-border funds. Advantages include a high level of investor protection and a large diversification of investment strategies on offer.

“The UCITS brand name still dwarfs those of other fund structures today. An internationally recognisable fund structure is very important especially for our distributors that are global banks as many of them look to be able to market the same vehicle across different regions,” said Jeremy Tan, Legg Mason’s Head of Products, Asia (ex Japan).

As a result, UCITS are the dominant fund framework in many Asian countries and its reach in Asia is set to expand further after Australia’s regulator recently approved UCITS for institutional investors.

That said, UCITS took a number of years before it was enthusiastically taken up by the fund management industry and has now been running for more than two decades. However, there are some signs that its allure has started to fade, according to Remi Toucheboeuf, Head of Products, Asset & Fund Services Asia at BNP Paribas Securities Services.

“Some regulators in the region, like Taiwan, are tightening the rules on UCITS while in Hong Kong the number of UCITS registrations has started to decrease.”

Most importantly, the ARFP Joint Committee recognises that the ARFP is more than just a way to boost the fund management industry. It is part of a broader initiative to increase trading in financial services across Asia Pacific and to encourage long-term coordination of regulation across countries in the region. As well as encouraging savings to stay in the region, its success could pave the way for greater co-operation between regulators and financial services across Asia, creating a more unified and efficient marketplace.

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