Complexity, unity, opportunity
The future of fund management in Asia-Pacific
The future of fund management in Asia-Pacific
Asia-Pacific continues to offer a tantalising opportunity for international fund managers, as the region grows richer and barriers to cross-border investment continue to fall. But seizing this opportunity will not be straightforward.
Although regionalisation is continuing apace, the creation of a common market akin to the European Union is some distance away. As a result, success requires partnering with a team that understands the region intimately and that can apply the latest technological innovations to streamline the process of servicing Asia’s varied markets.
“Most of the time you need to operate through a local fund structure and operating in so many markets is very complicated, as is regulation,”
notes Remi Toucheboeuf, BNP Paribas Securities Services, Head of Products, Investment
and Fund Services (IFS) Asia
Asia-Pacific markets are getting wealthier and need more ways to manage that wealth. Average household assets in the region have grown 10% per year since 2009. That figure hides huge disparities; Singapore’s per-capita GDP is close to USD 90,000 while that of the Philippines is USD 7,700.Yet across the region there has been a massive expansion in demand for managed fund products. The net assets of Asia-Pacific regulated open-ended funds, for example, have grown over USD 2 trn in the past five years.
Select Markets: Regulated Open-End Funds
Total Net Assets Millions of US dollars, year-end
Source: International Investment Funds Association (IIFA), 2017
This is not to mention China, the size and potential of which dwarfs Asia’s other markets. According to the consultant Casey Quirk, assets under management (AUM) in China are set to grow from around USD 2.8 trn in 2016 to USD 17 trn by 2030. In just two years’ time China will become the world’s second-largest asset management market globally, behind the US.
Efforts to promote the cross-border sale of fund products and introduce regional standards are likely to turbocharge growth in asset management in the region. One of the most exciting of the cross border schemes launched in recent years, the Asian Regional Funds Passport or ARFP, is expected to go live in January 2018. The five participants—Australia, Japan, New Zealand, South Korea and Thailand— include the world’s third, fourth and eighth-largest pension fund markets by AUM. In terms of fund assets these markets are also massive: for regulated open-ended funds Australia is sixth largest globally with USD 1.61 trn, Japan is eighth with USD 1.46 trn, and South Korea is 14th with USD 371 bn.
A comparable programme, the ASEAN Collective Investment Scheme (CIS), went live in 2014 with Singapore, Malaysia and Thailand participating. Under this framework, the units of a fund authorised in one CIS domicile can be offered in other participating countries upon approval by both sets of regulators. Although it has started slowly it is gaining traction, with the Philippines recently expressing interest in signing a CIS memorandum of understanding.
“At some point will the multiple schemes in the region consolidate into one pan-Asia scheme? In the longer term, it is certainly possible”
notes Adam Halvorson, BNP Paribas Securities Services Product Manager, Investment and Fund Services Product, Australia.
Additionally, China has launched schemes to allow greater access to its market. In 2015 it launched the landmark Mutual Recognition of Funds (MRF) programme with Hong Kong, which allows funds domiciled in Hong Kong to be sold in the Mainland (with certain restrictions) and vice-versa. Singapore is also exploring a MRF scheme with China, in line with the Industry Transformation Map for financial services announced by the Monetary Authority of Singapore (MAS) on 30 October 2017.
As fund passporting takes off, international fund managers stand to benefit from the simplification of some of the rules and regulations around product distribution. At the same time, competition is likely to intensify, in part as fund managers in mature Asia-Pacific markets try to service their clients’ demands for diversification. Such demands are only likely to grow: there is already more money invested in Australian superannuation funds (AUD 2.3 trn), for instance, than the market capitalisation of the entire Australian stock exchange (AUD 1.86 trn).
“A key part of the ARFP from an Australian perspective is that Australian investors have increased investment choice as they diversify their investments, and there is also a tremendous opportunity to export the Australian fund management industry”
Competition is likely to increase between cross-border fund providers. In recognition of the fact that cultivating domestic players is preferable to seeing money flow into European UCITS funds, regulators in the region are preparing the ground for passporting by streamlining rules and rolling out international-standard regimes. Currently three of Asia-Pacific’s most important markets, Australia, Singapore and Hong Kong, have used trust-based structures for collective investment funds, but they are all in the midst of switching to structures more similar to UCITS vehicles.
For international fund managers, these developments create an opportunity that’s “a mixture of being able to set up more locally domiciled funds and also to bring their existing UCITS over to Asia, whereas previously they’ve had to create different structures or had a lower range of offerings in markets outside of Europe,” notes Gary O’Brien, BNP Paribas Securities Services Regional Head of Custody Product, Asia Pacific.
As passporting evolves - and as digital platforms proliferate across Asia—the decision about where to locate physical operations will perhaps become less crucial. But market-specific rules around taxation, custodians, distributors and agents, not to mention KYC and governance issues, will still need careful monitoring.
Looking into the future, the ultimate goal of harmonising Asia-Pacific markets for fund distribution looks like a real possibility. Winning in the region will take trust in partners who are intimately connected with it, and who can bring the latest technology to bear in streamlining the complex process of servicing Asia-Pacific markets.
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