The arrival of Asean’s fund passport initiative last week was met with a sigh of relief from Asia’s asset management community, although operational details have raised concerns about compliance, time-to-market and costs.
Justin Ong, Asia Pacific asset management leader at consultancy PwC in Singapore, said he expected the first Asean fund to be launched in the first quarter of 2015, most likely out of Singapore since firms there are more accustomed to cross-border business.
However, he observed that many of the scheme’s guidelines fell under control of the three separate host jurisdictions (where each fund is distributed), which he fears could lead to delays, duplication and lack of standardisation.
“The whole idea of the scheme is to expedite fund approval, but if you look at the guidelines, a lot falls under local requirements,” said Ong. “Time-to-market is therefore dependent on each host country, so that doesn’t really help.
“If a fund is [approved] under the Asean CIS [collective investment scheme] programme, it is recognised as safe for investors. Time-to-market should be pre-arranged – say a maximum of one month. If a fund has been approved in any jurisdiction, it should instantaneously be approved in the others. Fund managers do not need to repeat all the documentation and process.”
He noted, too, that the Asean CIS was subject to reporting requirements in each host jurisdiction, unlike Europe’s Ucits scheme. “If you go to Malaysia, the documentation requirement and format may not be the same as Singapore, so it doesn’t really expedite the process,” said Ong.
“This is the first cross-border scheme [in Asia Pacific], so it’s fine as a start. The next stage of evolution will be standardisation, because [as things stand] now it could end up in different formats.”
At the same time Ong acknowledged the market was still digesting the initial framework. He expects clarifications to be sought with regulators in each jurisdiction in the next few weeks.
This includes the scope of compliance. Under the guidelines, a CIS operator is required to appoint an independent auditor to conduct an annual audit and submit it to both the manager’s home regulator and host regulator of its fund.
But Ong argued the scope of the compliance audit and what standard to use was unclear. “Some markets may do a lot of work, others may do less because there is no agreed benchmark. The quality of compliance will be called into question. We will reach out to regulators to clarify.”
Mostapha Tahiri, Singapore head at BNP Paribas Securities Services, pointed out that currency restrictions and regulatory compliance were potential hurdles for fund managers as Malaysia and Thailand had foreign exchange and repatriation controls. As a consequence, he said BNPP had initiated discussions on transfer agency solutions in preparation for fund launches.
“The introduction of the framework gives investors attractive investment opportunities, encouraging them to switch part of their bank deposits into Asean CIS,” he said. “The resulting projected growth in the participating countries from this cross-border investment opportunity will likely be 70% growth in total AUM across the next five years.”
Similar to Ong, Stewart Aldcroft, CEO of CitiTrust, expects first-movers of Asean CIS to be firms from Singapore, which has an active cross-border business.
At the same time he noted that cost considerations could lead fund houses to seek to relocate mid- and back-office operations from Singapore to Malaysia, where costs are cheaper. CitiTrust itself has set up runs back-office functions out of Malaysia, which Aldcroft is saying could end up as a big winner.
He added: “I struggle to see why Singaporeans would invest in an Asian equity fund managed out of Kuala Lumpur or Bangkok when they have had access to such funds for many years. So maybe now there is some rationale for Thai and Malaysian funds to go regional.”
Establishing local distribution capabilities in participating passport countries would be the next big challenge, noted Aldcroft, with firms looking to work with local banks and/or local and regional insurers operating an open architecture platform.
Franklin Templeton Investments (FTI) is one firm evaluating to what extent to set up a locally domiciled platform in Malaysia and Thailand and how to replicate existing funds to take advantage of the passport scheme.
“Several of our Singapore-registered funds [Luxembourg Sicavs] are distributed across the region through white-labeling [feeder fund] arrangements with local asset managers," stated Stephen Grundlingh, head of Southeast Asia at FTI. "We anticipate that for now this may remain the most attractive and cost-effective distribution proposition."
Aldcroft also expressed the hope that the Asean CIS launch would act as a catalyst for the Hong Kong-China mutual fund recognition scheme, initially announced at the start of last year but superseded more recently by the Shanghai-Hong Kong Stock Connect programme.