Asia passports 'no threat to Ucits'

The Alfi chairman says Chinese investors remain inward-looking, while only Singapore in the other proposed passport schemes is a big Ucits market. Critical mass may be an issue.
Asia passports 'no threat to Ucits'

The chairman of Luxembourg's fund industry association, Marc Saluzzi, has dismissed the threat of Asia's three proposed fund passport schemes to Ucits managers as overblown.

Saluzzi, who heads the Association of the Luxembourg Fund Industry (Alfi), has little faith that the planned mutual recognition scheme between Hong Kong and China will take off as mainland retail investors can already source domestic fixed income funds yielding 3-6%.

As such they have little need to seek yield overseas, and are further incentivised to stay at home by the prospect of RMB appreciation.

Appetite for overseas investments has further been called into question by the lack of enthusiasm for the qualified domestic institutional investor (QDII) scheme, which was introduced on the mainland in 2006 to allow local investors to access foreign securities. But the response to that initiative has been so weak that QDII funds currently make up just 2% of assets under management in China's funds industry.

The question Saluzzi appears to be ignoring is, what if the 3-6% in "risk-free income" turns out to be a fallacy? China experienced its first onshore bond default - Chaori Solar - this March, as well as the near-failure of a $490 investment product offered by China Credit Trust in January, prompting many fixed income managers to shun Chinese credit (see AsianInvestor magazine's May 2014 edition).

But Saluzzi is similarly sanguine about the proposed Asean fund passport scheme since it has yet to include the geographic grouping's largest market, Indonesia.

For the Asia Region Funds Passport initiative, he said he has little fear for Ucits managers because of its signatories so far, only Singapore is a key Ucits market.

Some 67% of the world’s cross-border funds are domiciled in Luxembourg. The rapid growth in cross-border fund distribution had seen more than 4,129 Ucits funds sold into Asia by the end of last year, according to PwC and Lipper data, although China remains virtually untouched.

Saluzzi goes on to reason that the Ucits story in Asia is distinctive compared with other emerging markets because it has been driven by retail investors. By contrast, Chile, the dominant market in Latin America, relies on institutional investors and comprises mainly fixed income products.

“In most big Ucits markets in Asia – notably Singapore, Hong Kong and Taiwan – these [Ucits] funds are high-yield products. Retail investors in these countries are keen to capture the additional income and are ready to take the additional risk,” he noted.

He stressed that while Ucits managers should keep abreast of regulatory developments in Asia Pacific, significant changes to distribution strategies in Asia are, for now, unwarranted. He argued that Ucits has years to run as the favoured vehicle for what is a rapidly growing investor universe.

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