SINGAPORE ROUNDTABLE: Elephant in the room

Several fund passport schemes in Asia have the asset management industry buzzing, but there are critical issues that need to be addressed before the schemes take off. The elephants in the room, as our panel in Singapore suggests, are perhaps Japan and India, neither have subscribed to a fund passport scheme. Our panel also discusses whether these collaborative efforts can bring down other regulatory barriers, the opportunities presented by the recently launched Shanghai-Hong Kong Stock Connect, and the challenges of regulation from Europe and the US. Edited by Stefanie Eschenbacher. Singapore roundtable dec14 Alex Henderson (Henderson Global Investors, managing director of Asia)
Tino Moorrees (BNP Paribas Investment Partners, CEO for Hong Kong, head of business functions)

Michael Chan (BNY Mellon Asset Servicing, Asia Pacific, CEO)
Praveen Jagwani (UTI International, CEO)
Funds Global: Asset managers have already started to prepare fund ranges compliant with the new standards of the Asean Funds Passport. Do you plan to get involved? Which products do you consider suitable under the schemes? How will demand for products differ across Asia? Alex Henderson, Henderson Global Investors: Asset managers have to slow down when it comes to the various fund passporting schemes in the region. The Asean passport caps overseas investment management at 20% of the net asset value of the fund. This is a significant restriction for asset managers. Regulators here are aware of the issues this causes for asset managers, and they are also aware of the fact that this restricts the choice of funds that asset managers can distribute across the region. Tino Moorrees, BNP Paribas Investment Partners: Products sold under the Asean passport are required to be managed in one of the Asean countries; asset managers would have to have their fund management teams in place and be able to service their clients. Even if they have a presence in one or two countries, they would need to be able to service their clients in the others. In order for a presence to be economically viable, there would have to be more demand for funds and it is at this stage questionable that more demand for funds will be created because of Asean passporting. Michael Chan, BNY Mellon Asset Servicing: The larger, regional asset managers in the Asia Pacific region have already set up a lot of new funds in domiciles such as Luxembourg and Ireland to sell them back into their home markets, which is probably a more efficient distribution strategy for those asset managers. Global custodians play an important role here because they will have to help build such distribution channels. AH: Those that already have a presence in the region have an advantage because they can build upon their local product range, and tailor others to meet the passporting requirements. The various fund passporting initiatives are relevant to us, and we follow these developments closely, but challenges remain. MC: Asset managers and asset servicers want these passport “roads” so they can distribute their products and services in new markets, thereby growing their businesses. Are investors even aware of fund passporting?  And are they likely to take up these products? Building these “roads” and having a passport to travel is one thing, but we also need to ask ourselves where we are going. There has been nowhere near enough education for investors about the opportunities and challenges of fund passporting. FG: Could these fund passport schemes bring down other challenges to investment, such as currency controls and issues around repatriation? Do you expect limits on international exposure for local asset managers, such as in Malaysia, to be lifted as a result of these passport schemes? AH: The Asean passport has countries in the world buzzing, but there are indeed a number of critical issues that need to be resolved before it can really take off. Perhaps the most important ones are taxation and operational issues. Regulation around taxation in Asia is different from Europe, where taxes are levied on dividends and capital gains. Asia does not necessarily tax dividends derived from overseas investments, and most do not even tax capital gains. MC: The concerns around taxation could be overcome by establishing a system whereby tax is distributed to unit holders, and at the end of the year passed back on to them. Currency controls are an issue, but the concerns around taxation have been overblown as a reason for why fund passporting should not happen. Building such “roads” is possible, but the question is, is it what investors want?   FG: How do you expect Singapore’s role to evolve, given that it is also part of two different fund passport schemes? Do you foresee synergies between the Asean Funds Passport and the Asian Regional Funds Passport? Do you expect further collaboration between Asian markets? AH: Malaysia and Thailand are behind Singapore when it comes to the development of their financial sector, and asking Singapore to join forces with them is a big ask. Over the next decade or so, fund passporting would be a huge opportunity for Malaysia and Thailand, but right now these countries would be better off setting up a business in Singapore and passporting their funds back into their home markets. The local regulations in Malaysia and Thailand are still too restrictive for asset managers, and Singapore would give them more freedom and flexibility when it comes to product development. FG: Ucits funds have seen inflows for two consecutive quarters, which has also seen several high-profile new launches. Is this a short-term trend or are Ucits funds back in favour with investors? Praveen Jagwani, UTI International: Ucits is definitely here to stay, simply because regulators are already familiar with the structure. Ucits is a common denominator. When it comes to Asian fund passports, we have not come far in the five years since the initiative started. We have an agreement on paper between countries, but the economic interests of those that have the money and those that want the money are not aligned. MC: It took Asia passporting five years to get where it is now, whilst it took Ucits in Europe 30 years to get where it is. The only thing stopping Asia is the political will; Hong Kong and China made the Shanghai-Hong Kong Stock Connect happen, and they will also eventually make mutual fund recognition between Hong Kong and China happen. All these fund passport schemes could happen tomorrow, if political will is overcome. AH: However cynical we are, it was not long ago that we first talked about fund passporting schemes. We have to give the regulators some credit that they have managed to get together and find common ground. TM: The industry is already getting ahead of itself. Two of the three markets in the fund passporting scheme – Malaysia and Thailand – are nascent, and education has to be the first step. AH: If Henderson Global Investors were to take a fund into Malaysia, more than two thirds of the assets would have to come from outside of Malaysia, which would violate currency restrictions imposed by the Malaysian government. TM: If we put political agendas aside, would the most efficient solution not be to further develop Ucits to suit the needs of non-European investors? MC: This goes back to political will, because local authorities want to be in control of their domain. AH: There is no denial that Asia is not homogenous. It is a heterogeneous region and fund passporting could bring all these countries together in the same way that Ucits brought European countries closer together. Although these schemes are in the nascent stages, the potential is there. PJ: Even with a fully developed fund passporting scheme, it will be difficult for an Indonesian asset manager to make a dent elsewhere in Asia. They would need to raise their game significantly to survive in what is already a fiercely competitive business. Regulation for funds in Singapore is similar or tighter to that for Ucits funds. MC: It is fair to say that a lot of the regulations in Europe were built on the ground of cultural commonalities, but fund passporting in Asia tries to glue countries together that do not have these commonalities. TM: A common currency is another aspect regarding these commonalities. This is an aspect that complicates these initiatives in Asia. AH: In the 1980s, when Ucits first launched, European countries had many different currencies. MC: There have just been calls by the Hong Kong stock exchange to establish a common governance scheme in Asia Pacific for all countries, but that is unlikely to happen any time soon. PJ: The only ones who stand to gain from fund passporting schemes in Asia are Singaporean asset managers. Would asset managers in the Philippines, Indonesia or Thailand really step up their efforts, change their regulation, their operating procedures and their prospectuses to be able to compete with Singaporean funds? MC: Asian countries are already seeing Ucits taking money away from them, and that is exactly why the local regulators want to create their own schemes. PJ: It is already easier to get a Ucits fund approved in Thailand, Hong Kong and Taiwan than a Singapore fund. FG: Do you see Ucits funds joining this scheme, or a possibility for asset managers to repackage their existing Ucits funds and sell them under local fund schemes? AH: Ucits funds would not qualify, given the stipulations of the regulators, and Ucits would have to conform with rules made in Asian countries. Although Ucits funds could be adapted to conform with local rules, the question is whether the effort is worth it. Ucits would have to go through significant remodelling to conform with local regulations, so unless there is demand for those exact structures, these funds are unlikely to join the fund passporting scheme. PJ: There is already a proliferation of Ucits funds everywhere, and 92% of all offshore funds sold in Singapore and Hong Kong are Ucits. The same is the case for Taiwan. Having a fund passporting scheme alone cannot achieve the results, without replicating the economic integration the European Union has. TM: It works both ways. I wonder whether Luxembourg authorities would recognise the rules set in place by Indonesian regulators. The answer might give an indication how far apart Asia and Europe are. AH: There is a strong connection between Hong Kong and China, but also between Singapore and Australia. FG: With more asset managers from different countries selling their products, how will distribution channels and marketing strategies have to adapt? How do you see e-commerce evolving? AH: We use partners in both Malaysia and Thailand, and their relationships with local banks, which dominate distribution locally, are strong. We work both on a sub-advisory basis and distribute our own funds. PJ: Local banks will typically only consider funds with at least $100 million of assets under management and a three-year track record. There are challenges around negotiating trailer fees, and how much the asset managers receive from that. Some regional strategies have managed to attract $100 million of assets, and established a three-year track record, but how much does a Malaysian asset manager have? The more established asset managers will have a clear advantage. TM: It is remarkable how technology-savvy people in Asia are, but some of them still prefer to get advice in person through their relationship managers, even though they could purchase funds online at a discount. MC: People want to go and see their relationship managers; they are often offered coffee and biscuits. AH: Investors in Asia prefer to go and see their relationship managers in a priority, privileged or VIP setting, where they are often offered coffee and biscuits. They do not mind waiting, even if it takes a little longer, for a higher level of service. TM: The incentive for independent financial advisers to distribute funds is disappearing in some countries because asset managers can no longer pay distribution fees. This has contributed to the rise of exchange-traded funds (ETFs). Asset managers will have to consider alternative distribution channels, including e-commerce. AH: Henderson Global Investors could not do without the intermediary distribution channels. FG: The markets of Singapore, Malaysia and Thailand are, combined, a lot smaller than those of the two other schemes – the Asian Regional Funds Passport and mutual fund recognition between Hong Kong and China. How can the Asean Funds Passport scheme achieve scale? MC: Considering the three different passporting schemes, is Japan the elephant in the room? AH: Japan is interesting, from an investment point of view and from a distribution point of view. It is the biggest elephant the asset management industry has seen. MC: If Asean countries can demonstrate a proof of its passport concept, they could take it to the regulators in Japan. TM: Japan resembles Australia more than any country in the Asia Pacific region – both have large institutional markets, but are difficult to crack on the retail side. The most logical combination would be Australia and Japan when it comes to market similarity. MC: Japanese investors are familiar and comfortable with offshore structures such as in Jersey and the Cayman Islands, but Australians are less so because of tax reasons. PJ: Having had low interest rates for more than 15 years, Japanese asset managers have been pushed to invent new solutions, pushed to look outside their shores. AH: Multi-channel share classes, both hedged and unhedged, is a prerequisite to success in that aspect, and it is true for other markets as well. Renminbi will be the next share class to consider. PJ: Accessing Japanese retail money is hard; asset managers would have to find a local partner and place an onshore fund that then feeds into a Ucits fund. The struggle then is to find distributors, but that is a given for every new market. Prospectuses also need to be translated into Japanese, while most other regulators in Asia are comfortable with English. There is definitely a language barrier. MC: Investors in Japan sometimes demand that the net asset value is stated in 12 decimal place in yen, that is the accuracy they want. Failing to comply with local regulation is not well accepted. AH: Whether Japan would join one of the fund passporting schemes would depend on what is in there for them? What would be attractive for Japan? It is the income story. MC: Whichever fund passport scheme Japan joined, would be the one most likely to become successful. PJ: India is less developed, and there are a lot of local opportunities, so there is less interest in offshore investment. If asset managers want African money, why would they go to Nigeria and Kenya? Geneva is the place to go to. The Indian regulator has also placed a cap on the amount of money that investors can hold in offshore managed accounts. Rich resident Indians hold their money in Switzerland, Dubai or Singapore. For the rest, given high domestic interest rates, there is little desire or awareness of offshore investments. Selling international funds in India is challenging, and it will take some time for international asset managers to distribute their fund ranges in India. Indians prefer to hold their wealth in real estate and gold. FG: What are your expectations of the Shanghai-Hong Kong Stock Connect? What opportunities will this present for the asset management industry? Do you expect the popularity of products under the RQFII or QFII programmes to diminish as more channels to invest in China open up? TM: It will mark a major milestone within the broader context of the reform of China’s financial markets. This programme is an important step within Beijing’s overall master plan to accelerate renminbi and financial market liberalisation. With the introduction of stock connect, onshore mainland investors and international investors will be able to directly access Hong Kong-listed and Shanghai-listed shares without pre-approved licenses and quotas. Stock connect will create the second largest global equities market by market capitalisation, at $6.7 trillion.  For international investors, this represents an additional $4 trillion of market capitalisation that will be added to the investable universe. Both MSCI and FTSE will revisit the A-shares decision in their next annual review, and we believe the stock connect programme may be the solution that will drive a favourable outcome. Stock connect will make Chinese A-shares easily accessible to international investors, thus removing the key concerns highlighted by MSCI and FTSE. It will create a paradigm shift and represent a significant milestone for China’s financial markets. For global and emerging market investors, participation in stock connect is essential, as it provides a new framework for investing in China. Stock connect will co-exist with the current qualified foreign institutional investor (QFII) and renminbi qualified foreign institutional investor (RQFII) schemes over the next few years. Until the eligible stock connect investable universe is completely expanded, and until the northbound daily and aggregate quota caps are significantly relaxed, QFII and RQFII remain relevant for Chinese equities. However, over time, it is inevitable that QFII and RQFII schemes will be displaced by stock connect as new asset classes within stock connect are ramped up. Stock connect implies a major revamp of the China product offering. The new paradigm will remove barriers to entry, allowing asset managers to compete on a level playing field. FG: What challenges and opportunities lie ahead for Singapore? AH: The momentum and growth Singapore has seen in the past two decades is staggering, and it is ongoing. Unlike Hong Kong, it is an independent sovereign. The asset management and asset servicing industires are the most sophisticated ones in the region, but we are not shy to tell the Monetary Authority of Singapore that they are getting expensive. PJ: The big fear factor in Singapore, which has grown arguably at the expense of the crumbling Swiss private banking industry, is US regulation. It will be interesting to see if some day US regulators start applying pressure to Singapore on transparency of client data. AH: Consolidation in the private banking industry is likely. TM: Regulation, and the need to comply with it, is becoming crucial for asset managers to operate. This requires resources, and more investment. ©2014 funds global asia

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