Asset managers have been lobbying the regulator in the Philippines to make changes to allow the feeder fund market to gain full traction, and they believe this may be close to happening.
The Philippine central bank, which regulates feeder funds, is reviewing the last sticking point regarding onboarding of these products’ underlying funds – which are mainly Ucits-compliant products. And industry players say the advent of regional fund passporting is another compelling reason for Bangko Sentral Ng Pilipinas (BSP) to consider relaxing the constraint.
Under the BSP rules, local funds are not allowed to use financial derivative products other than for hedging. But many Ucits products use derivatives for hedging as well as efficient portfolio management; this is true of most JP Morgan Asset Management products, for instance. The restriction also applies to funds of offshore funds and products that invest into exchange-traded funds.
Onshore feeder fund assets under management are estimated at just $500 million to $1 billion, but the country is just starting to open up to offshore funds and investors are said to be keen to diversify their portfolios.
The industry has been lobbying the regulator, said Allen Martin Dee, head of investment solutions at BPI Asset Management and Trust Group, the country’s second largest fund house, with Php592 billion ($13 billion) under management. He added that the rise of regional fund passporting was another good recent reason to ease rules on overseas products.
The Philippines is keen to join the Asia Region Fund Passport, but has yet to be accepted because some of the domestic rules are not aligned with international standards.
Moreover, the country is late to the game when it comes to feeder funds. Malaysia and Thailand already have thriving markets for such products, with AUM of RM7.8 billion ($1.93 billion) and Bt319.6 billion ($9 billion), respectively.
This discrepancy in regulations has stopped foreign asset managers from distributing their funds onshore via feeder structures. Hence local managers only have a limited pool of products to choose from.
“That’s causing us to run into some difficulty in finding a fund that we can invest in,” said Michael Ferrer, managing director at Manila-based ATR Asset Management, which has seven feeder products. The rule related to derivatives is the only remaining obstacle to feeder funds taking off, he added.
Industry players argue that the fact that Europe’s Ucits structure is a regulated one used by many markets should give the BSP some comfort when it comes to investor protection.
Ferrer conceded that there could be an issue as to how the regulator and local fund managers would be able to monitor the use of derivatives in these offshore funds.
A BSP committee is working with the industry to review the issue, he noted, but he declined to estimate how long it would take to be resolved. “It could be a resource issue, because there's a lot on the regulator's plate right now,” Ferrer said.
He added that BSP had relented on another sticking point by saying in March it would allow underlying offshore funds that have investments in other collective investment schemes. This is something Ucits-compliant funds do to manage cash, for instance.
As a result, Ferrer is optimistic that there is scope for the alignment of local rules with international ones. "It just needs more presentation and discussion with participation from the offshore fund management community,” he noted.
BPI AM’s Dee said the rule around the use of derivatives had led his firm to be conservative in its approach to feeder fund launches. It only has two such products, one investing into State Street Global Advisors’ SPDR S&P 500 exchange-traded fund ($23 million in AUM) and the other into Wellington Management’s strategic European equity fund ($7.5 million).
BPI AM wants to launch another feeder fund investing into emerging markets, but said it would wait until BSP has given more clarity on the issue.