Are investors losing patience with fund passports?
The idea of a pan-Asian funds passporting scheme has long appealed to fund managers and—to a lesser extent—regulators, but there are fears that potential participants in certain schemes may be giving up on the idea.
The ability of fund houses to distribute funds across borders, under transparent licensing and tax rules, is an alluring one. It would give retail investors more product choice, and could offer fund managers a cross border customer base.
But reality has been less impressive. None of the three funds passporting schemes either currently in operation or in the planning stages is living up to the ideas behind them.
The Asean Collective Investment Scheme (CIS), for example, has sputtered along, with only six funds approved for sale by both home and host countries across Malaysia, Thailand and Singapore since becoming the first to launch in August 2014.
The Hong Kong-China Mutual Recognition of Funds (MRF) has had more success. Fifty China funds have been approved for sale in Hong Kong and 24 launched since July 2015, while 14 northbound funds have been approved, with 10 launched.
But net sales of Hong Kong funds in China and China funds in Hong Kong stood at $1.85 billion and $72 million respectively as of April—well short of the scheme’s $46.9 billion investment quota.
Then there is the more ambitious Asia Region Funds Passport (ARFP), which is slated to start operations in August. Participants include some of the bigger markets in the region, including Japan, Australia, Korea, Thailand, and New Zealand. However, getting all the jurisdictions to agree to a single regulatory framework remains a challenge. Observers think it would be noteworthy if the scheme approved one to three funds in its first year.
As a result, fund houses are losing patience with the idea. “Many people who are involved in cross-border work who’ve got regional firms are getting to a point of saying to themselves, ‘Why bother?’” said Stewart Aldcroft, Hong Kong-based chairman of CitiTrust, which offers trust and wealth planning services.
IT'S COMPLICATED
Funds passporting is, by its very nature, complicated. In order to be sold into multiple countries, funds need to comply with the rules of each one. And the regulators of each needs to agree to identical tax resolution, as well as issues around foreign currency and distribution harmonisation.
Tax is the real sticking point. Singapore pulled out of the ARFP because its lower tax rate relative to the other participants would put its managers at a disadvantage when bringing funds to a higher tax regime, as opposed to them bringing their funds to Singapore. And it’s not possible to get all participating countries to change their tax rules to a single rate, said Amy Ang, Asean financial services organisation tax leader at consultancy EY.
Currency and monetary policy in Asia can also vary widely. It’s unlikely that countries will let their domestic currency policies bend for passporting preferences, so participating funds often have to become dual currency to even get the funds up and running, Ang told AsianInvestor.
This is the case for the Asean CIS, with funds like Nikko Asset Management’s Singapore Dividend Equity Fund available in Singapore dollars in Singapore and in Malaysian ringgit in Malaysia.
Additionally, the issue of funds distribution looms large.
“The way in which you sell the product in Thailand, in Malaysia, in New Zealand, or Australia for the ARFP would have to comply with each local jurisdiction, which is not consistent,” Ho Han Ming, partner at law firm Sidley Austin, told AsianInvestor.
The Asean CIS started out slowly because funds had to go through each individual jurisdiction’s governance framework, with domestic authorities approaching each fund as an isolated case, resulting in delays in the approvals process and killing interest, said Ang.
With Asian funds passporting still in its infancy, and growing slowly, there is a danger that investors and fund managers lose patience with the entire concept.
Some of the obstacles to Asian funds passporting could take up to 15 years to overcome.
Fund managers wanting to grow their business are unlikely to wait that long for the regulatory changes to catch up, added Mark Voumard, chief executive of Gordian Capital Singapore, a fund management platform provider.
Look out for the second part of this story, in which we discuss how technological developments could infueunce the future of funds passporting. The full story was published in the June/July edition of AsianInvestor magazine.