29 September 2017

INSIDE VIEW: The spirit of ’88

Published by Funds Global Asia – Sep 2017

Europe introduced Ucits in 1988. Thirty years on, Asia launches its own regional passport, the ARFP. Armin Choksey of PwC discusses the scheme.

It’s finally here. The multilaterally agreed framework to facilitate cross-border marketing of mutual funds across participating economies, the Asia Region Funds Passport (ARFP), is on the anvil to be launched with a statutory start date of January 1, 2018.

To the heterogeneous Asia-Pacific market, the passport offers opportunities of consolidation, sophistication and the creation of a level playing field. Market dynamism in the region provides investors with opportunities that are hard to find in other developed and developing regions. Attractive interest rates, a growing middle class, the establishment of various fund passports and an ageing population all contribute to the high projected growth of assets under management. We expect assets to rise from $12.1 trillion in 2016 to $29.6 trillion by 2025, representing growth of 10.45% a year.

In a report published by Asia-Pacific Economic Cooperation, it was stated that ARFP could save Asian investors $20 billion a year in fund management costs. The Asia-Pacific region spans a 12-hour flight north to south and ten-hour flight east to west, proving the value proposition for digital distribution in the region. Additionally, the speed at which technology has been disrupting traditional distribution models has already started to show in the region, much faster than in many other developed and developing economies. This provides an opportunity for a potentially homogeneous and regulated product, ARFP funds, to be distributed via digital platforms.

It was 1988 when Ucits (Undertaking in Collective Investments in Transferable Securities) was introduced in the European Union. With the introduction of the ARFP, 2018 has now become Asia-Pacific’s 1988.

To boldly go
Australia, New Zealand, Japan, Thailand and South Korea have signed the memorandum of co-operation. These countries will go down in history as the first signatories to this unique initiative.

As it takes only two economies to officially begin the passport programme, the debate is now on – which countries will take the bold step forward?

Luxembourg took the lead to implement the Ucits directive into local law back in 1988. Currently, Australia seems to be following Luxembourg’s footsteps by being the first to localise the law, already requesting public comment on their local rules to implement ARFP. Japan is following suit by releasing various guidelines on operational flow for asset managers. The market is speculating that Japan and Australia could be the first two to officiate the programme.

More and more economies have expressed interest to join this initiative. It is speculated that India, Indonesia, Taiwan, Malaysia and Vietnam have raised their hand. The introduction of ARFP to most of these economies would provide significant potential to their local asset managers to upscale their distribution to multiple markets.

The domestic asset management industries in Asia-Pacific are quite locally insular and dense with fund managers managing domestic asset strategies that are offered to local investors only. For example, in Australia, about 58% of local mutual funds are focused on local assets strategies. In Japan, 60% of local mutual funds are focused towards Japanese equities, money market and fixed income strategies. Another example is Thailand, where local asset strategies account for 74% of the market.

This focus on local strategies constrains local investors to local asset exposure only. Cross-border fund distribution would offer local investors more choice, allowing them to diversify their investment holdings.

Global shifts
In future, Asia will be the largest contributor to the global middle-class population. Opportunities in cities will drive more people from rural to urban areas. By 2030, approximately 1.8 billion people will move to cities globally. Asia will account for over half of this shift.

This growing population will have an increased focus on savings for retirement and healthcare, following the trend of Asia-Pacific countries to introduce mandatory retirement savings plans. Drawing a parallel to the past, one of the main contributors to the mutual funds market growth for the United States was the 401(K) retirement savings plan. The anticipated increase in savings in Asia-Pacific are likely to be channelled to diversified and regulated mutual fund products, such as the ARFP.

There is immense opportunity for local managers in the region to boost their distribution capability through ARFP. Our research has shown that there are 261 fund managers with $2.6 trillion of assets under management that are eligible to passport their products through ARFP among the five existing countries joined. Additionally, if countries like India, Indonesia, Singapore, Taiwan and the Philippines join the programme, it would add another 159 fund managers with $636 billion of assets under management.

With the ARFP rules set out in the memorandum of co-operation agreed upon last year, the participating regulators have managed to strike a balance between achieving market efficiency and investor protection. While the current consultation paper still does not clarify the tax alignment of foreign versus domestic funds, which was heavily criticised during the conception and the development stage of the AFRP, the annual report released by the joint committee of the ARFP does mention that a tax working group will investigate this mismatch.

Increasing the participation of the member economies in the passport scheme would ensure the further success of the ARFP programme. Similar to the ARFP, the Latin American market is also forming a passport scheme under the Pacific Alliance. Currently, Peru, Mexico, Colombia and Chile form part of this alliance, and the member states have resolved to form a similar integrated framework.

While they are currently looking to the Asian market for inspiration and guidance, there is the potential to have the Pacific Alliance merge with the ARFP to allow greater opportunity for the Latin asset managers to export their funds to larger distribution markets and thereby allow investors to diversify their investments by including emerging market strategies.

There is no doubt that the ARFP will lead to greater sophistication of the mutual funds industry in the Asia-Pacific region. The increased competition would pave the way for more innovative products, while also nurturing and supporting local talent. With the large economies signed up to the scheme, a growing list of ‘aspiring’ economies, and with regulators promoting the initiative, the ARFP is set to have a good beginning. Further promotion activity and aligning of tax issues would keep up the momentum for the first few years to allow the programme to flourish on its own, just like Ucits did in the EU.

Armin Choksey is asset and wealth management market research centre leader, PwC Singapore

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