The Asian asset management community has been making a lot of noise about regional fund passporting schemes in recent years.
The Asia Region Funds Passport (ARFP), an initiative spearheaded by the Asia-Pacific Economic Cooperation (APEC), has one of the better chances of success amongst the regional passporting schemes that have been announced.
The ARFP includes Australia and Japan, two of the world’s biggest fund-investor markets, along with Korea, Thailand and New Zealand. This is a realistic scheme that takes us a giant step closer to new market opportunities.
But it’s not that easy. The ARFP is a positive and much-needed initiative, but some parties are better positioned to benefit from it than others, and further development is needed before it can be declared a success.
Clear winners
There will be clear winners, while some stakeholders won’t experience significant benefits from ARFP. Existing market structures, competitive landscapes and previous regional positioning all play crucial roles in determining who will benefit the most from the scheme.
In many cases, it is too late to change your fortune, at least in the short term. The following stakeholders are sure to see benefits from the ARFP:
- The investors
Investors in ARFP markets should enjoy a wider choice of investment funds if the scheme is successful. Greater competition in these markets should drive down fees. Investors will have more choices, at lower cost.
- The distributors
Distributors will be able to offer a greater variety and volume of investment products, which should benefit their businesses. With ARFP, they will be able to offer products from outside their existing domestic environment.
- The innovators
In order to attract investors in a new market, you must offer a product they didn’t already have access to. Offshore managers need to offer products that differ from what exists in the domestic market.
For example, while a Japanese manager may be closer to their local market, it will be tough to generate excitement for a pure Japanese equity fund in Australia.
Managers with innovative investment tools, and new approaches, structures and ideas stand to benefit from the ARFP, because investors are hungry for new investment ideas and tools.
Funds that may have a better chance in succeeding may be ETF products, particularly specialty ETFs such as smart beta, actively managed or leveraged, and inverse.
However, regulators in some ARFP markets have been conservative in their approval of such products, so further regulatory negotiations are needed.
- International managers already in Asia
Large international managers with funds registered in one or more of the markets covered by the passport stand to benefit from the ARFP.
However, they will need to have an existing level of brand recognition in other regional markets if they want to capitalise on the opportunity to sell their products in new passport markets.
If they’re in the right position, they’ll be able to target new investors without having to build up another physical and regulatory presence.
Brand recognition in the new target market will play a significant role for fund managers hoping to take advantage of the ARFP.
- Australian managers
Australian managers are probably in the best position to benefit from ARFP, which is why Australia has been an active promoter of the scheme.
They have one of the most sophisticated asset management industry in Asia Pacific, due in part to their strong superannuation regime.
Their robust pension program has helped grow an innovative and competitive asset management industry that is keen to expand into new markets.
Managers in Australia have developed many new investment products, with solid regulatory records, which may appeal to Asian investors.
The challenges of diversity
It is often pointed out that Asia is a collection of unique countries rather than a homogeneous region, and that it is this diversity that makes it so special.
However, it also makes it more challenging for Asian jurisdictions to reach regional regulatory accords. One example of this is tax.
The jurisdictions that have signed onto the ARFP each have their own unique tax regimes. Some of these taxes favor domestic funds over offshore funds, making it more difficult for foreign managers to enter the market.
The ARFP scheme can only be successful if the issues around offshore fund taxation are addressed, resulting in tax neutrality and an equitable marketplace.
Another area of diversity is language. South Korea and Japan have two of the other strongest asset management industries in Asia, but they have always operated in their native languages, which may be a hurdle in their efforts to passport funds to English-speaking markets.
The industry has recognised these as challenges, and we’re confident that solutions will be found, allowing the ARFP to reach its full potential.
Worth waiting for
Whether or not the ARFP will become an effective distribution tool for global fund managers, and who will benefit the most, is yet to be seen.
At this juncture, the ARFP may not be able to bring significant new benefits to markets that already have regulatory regimes that welcome offshore funds.
In markets like Thailand where regulatory changes recently allowed qualified investors direct access to offshore funds, the ARFP won’t make a big difference.
Most fund managers’ response to the ARFP has been relatively lukewarm. There are several reasons behind this.
In part this is due to the early stage of the ARFP regime development. The excitement was previously focused on the Mutual Recognition of Funds agreement between Hong Kong and mainland China because it already matches one of the region’s most important fund domiciles with Asia’s fastest-growing investor market.
International managers are still using the European Undertakings for Collective Investment in Transferable Securities (UCITS) regime.
It’s been around for a long time and serves managers reasonably well, and few regional industry players outside of Australia see a pressing need for a new scheme.
More countries need to join the scheme and, ideally, Asia’s different passporting schemes should be unified.
Asia is a fragmented market by nature, and only unification of schemes can create the benefits of scale and momentum needed to create a successful Asia-wide investment fund passport.
While further fine-tuning is necessary and some already underway, the ARFP is the industry’s best attempt at overcoming a long-running challenge.
Looking at the development in 2018, the ARFP Joint Committee has called for expressions of interest from industry players to participate in a pilot program for the passport.
The pilot program would aim to test the passport framework and regulatory processes across participating economies to help identify the remaining barriers to trade and areas for future improvement.
It would provide an opportunity for the industry to get involved during the early stages of the passport and to work with regulators to develop suitable products.
A number of governments have also announced regulatory initiatives aimed to bring them closer to full implementation of the ARFP scheme in 2018.
Once the local legislations have been finalised in the key jurisdictions, we are likely to see the first ARFP fund launch in the near future.
Close co-operation between the regulators and industry will be fundamental to the ARFP reaching its potential as a powerful engine of growth for the Asian asset management industry.
Rohan Singh is managing director, head of asset servicing for Asia Pacific at BNY Mellon.
