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After years of discussions, there are now three separate schemes underway in Asia to develop fund passports: mechanisms through which a mutual fund registered in one jurisdiction may be sold in another. If successful they should strengthen regional capital markets.
Last week the Monetary Authority of Singapore, Malaysia’s Securities Commission and Thailand’s Securities and Exchange Commission agreed to build a framework for cross-border distribution of collective investment schemes. This followed an announcement in September at the APEC meeting in Bali of a similar initiative among Australia, New Zealand, Singapore and South Korea, which in turn followed an announcement earlier in the year of a mutual recognition platform for public funds between Hong Kong and mainland China.
The ultimate goal is something like the UCITS (Undertakings for Collective Investment in Transferable Securities) scheme which dominates mutual fund sales cross-border in Europe. According to the European Fund and Asset Management Association, total net assets in the UCITS scheme stood at Eu6.488 trillion at the end of June 2013. While nobody is expecting numbers like that in Asia any time soon, there is a feeling that fund passports would give greater choice to consumers, greater assets to local fund managers, and aid with the integration of regional capital markets that is a goal of Asean nations in particular. Set against that, Asian fund markets are much younger, and there is no single currency or legal framework.
The Hong Kong/China initiative is generally seen as being the most likely to succeed. “That looks very likely to occur before the end of this year, or the beginning of next year,” said Stewart Aldcroft, CEO of CitiTrust, part of Citigroup. “Frankly, the possibilities of participating in the Chinese market are so enormous that everyone should be trying to take that opportunity.” According to Z-Ben, the China-based asset management analysts, the Chinese mutual fund industry had RMB2.45 trillion ($400 million) under management by June 30, and the figure has been much higher in recent years. “That’s after an extended period of dreadful performance,” said Aldcroft. “What would happen if we see products that do give a good return?” Aldcroft believes a pilot programme will be tried for around 12 months before expansion, with membership granted to Taiwan within a further year.
The APEC proposal is driven from Australia, and Aldcroft said it has less chance of success. “Australia and Korea have been among the most vociferous in preventing international or offshore funds going into their market. If they continue, while trying to push their own funds into other markets, I have little sense of traction or success.”
The most recent proposal from the three Asean nations makes sense because of a history of cooperation between the three, but it features both a tight deadline – implementation in early 2014 – and onerous restrictions: funds must have a five year track record and at least $500 million in assets to be eligible. It is also conspicuous for the absence of the Philippines and Indonesia, which are expected to join in due course.
The schemes may help harmonise markets and allow local money to stay in Asia rather than heading out to dollar assets. Speaking of the APEC idea, Singapore’s Minister for Finance, Tharman Shanmugaratnam, also the MAS chairman, said it would “ultimately help in the much-needed deepening of regional capital markets.” That, in turn, would make them more resilient to outflows.
