Years of debate over fund passporting in Asia has left the future of the nascent cross-border model in some confusion, with a number of different schemes competing to be top dog.
Asia could be borderless with full transportability of compliant funds by 2030, as we look towards another 15 years of AsianInvestor. However, the jury is still out on whether this will be underpinned by a single fund passport framework, two passports, or none at all as technology disrupts the fund management eco-system.
Increasing consolidation in the funds sector could even leave the top 15 managers commanding the vast bulk of all fund sales and assets.
A number of industry players believe there will be a single fully functioning fund passport regime 15 years from now. Of the current frameworks, proposed or otherwise, their bet is on the Asia Region Funds Passport (ARFP), scheduled to launch next year.
They are optimistic that Asia will be a unified region supporting a single passport by 2030. They reason that Asean members are already making progress in building an Asean Economic Community that in the long run will be fully integrated into the rest of Asia.
“Fifteen years from now I will take a bet that Asia will be one bloc,” said Justin Ong, practice leader at PricewaterhouseCoopers (PwC).
The ARFP scheme already has the largest number of participating countries – Australia, Singapore, Korea, New Zealand and the Philippines. It is expected others will join, notably Indonesia and possibly Japan. Both are reported to have expressed interest, but have adopted a wait-and-see approach. Ong even sees China joining ARFP. “China is opening up its market and for them to be part of a fund passport scheme, ARFP makes the most sense,” he suggested.
He argued that it would be impractical to have two passport programmes in the region: “The Asean CIS will disappear. We need it now because funds passporting is in its infancy. Certain markets are not up to the level of maturity of other markets. They need a smaller scheme as an incubator before they jump into the big pool with the likes of Australia.”
Some industry players, however, believe two passporting programmes will still be in operation in 2030, along more regional lines.
“It’s more likely to be two passporting schemes, one to cover Greater China and the other the rest of the region, with each recognising the other,” said Stewart Aldcroft, senior adviser on the Asian fund management industry at Citi.
He predicts the Hong Kong-China mutual recognition scheme will morph into a Greater China scheme that includes Taiwan as well as Singapore, and that ARFP will grow to include up to 15 countries with the Asean CIS folded into it. “By 2030 we won’t be talking about passporting anymore as there will be open borders,” he noted.
And who will supervise firms in this borderless fund distribution age? Aldcroft reckons a regional supervisory regulator will be created – he ventures the “Super Asian Securities Regulatory Authority” – to establish rules that each authority must comply with, adapted to local needs.
Further, there is another group of industry participants who believe talk of which framework will succeed is irrelevant because technology will have overtaken them all by 2030. One went as far as to say that new forms of distribution could put the fund management industry out of business.
“Technology will be a complete disruptor,” said Nick Hadow, director at Aberdeen Asset Management in Singapore. “Distribution channels as we know them today will almost disappear as funds will come through a platform or portal which can be accessed both to buy funds and to open a bank account.”
Hadow predicted that by then people would buy funds at the press of a button, a process that will see fees cut substantially. Robo-advisers and other online financial services will develop, if evidence from the US is a guide – the Charles Schwab robo-adviser service raised more than half a billion dollars in three weeks this March.
Ken Woo, partner and asset management industry leader for Australia at PwC, said the speed at which robo-advisers were being adopted meant they would soon become part of the broader wealth management area. “When you think of robo-advisers, they are used by smaller investors. But they could very well get the same traction as a service like Airbnb has done,” he says.
The source of investments will determine which markets dominate, according to Hadow. As a consequence his money is on China, although he says there will be two financial hubs: Singapore and Shanghai.
He feels sure Shanghai will eclipse Hong Kong, which will by then be delegated as one of China’s prosperous cities. He doesn’t see any Southeast Asian country overtaking Singapore.
PwC’s Ong, also based in Singapore, thinks Hong Kong will still be an important funds centre, given its infrastructure and rule of law.
“My view is there will always be two locations: South and North Asia serving different customer bases,” similar to Europe’s Luxembourg and Dublin, which serve continental Europe and the US, respectively.
In terms of which asset managers will succeed in 2030, Aldcroft suggested that the top 15 or so would command 80%-plus of all fund sales and assets.
“Among this list will likely be at least three mainland Chinese fund managers, each of which will have close to $1 trillion AUM,” he noted.
“They will have a global presence and will have acquired some well-known previously western-owned fund manager brands.”
While everyone is of the view that Asia is careering towards a borderless funds market, clearly there are obstacles that will need to be resolved. The biggest one is taxation.
“When the fund passport is up and running it will become important for countries to recognise the different tax impediments and they need to do something about it. Fund passporting will create the pull for tax reform to happen,” said Woo.
So where will Ucits stand by then? Aldcroft argued it would continue to grow at a rapid pace, but instead of being so dominant in Asia, it would have become secondary to locally developed products. “Ucits will continue to seek market openings in Japan, Australia and China,” he said.
The move towards a borderless funds market is going to be driven by the growth in wealth in Asia. PwC predicts that the rise in volume of investable assets is set to increase from around $64 trillion today to $102 trillion by 2020, a compound growth rate of nearly 6%.
Growth in assets will be driven by three trends: a government-incentivised shift to individual retirement plans; the increase of high-net-worth-individuals from emerging populations; and the growth of sovereign wealth funds.
“The development and growth of pension schemes in many locations will become the single dominant influence on the fund management industry,” said Aldcroft.
“Within a few years regulators in the region will have imposed a ban on commissions for sale of financial products, including on both mutual funds and insurance products.”