The opportunities for fund managers in Asia-Pacific (APAC) should not be underestimated. The region accounts for one third of the global economy, while its middle class continues to grow. APAC’s burgeoning high net worth population (HWNI) is likely to edge past North America imminently, according to data from the World Wealth Report 2015 published by Capgemini and RBC Wealth Management. Cash-heavy institutional investors including pension plans, insurance companies and corporates are looking to invest their capital in this low interest rate environment, and fund managers could provide an excellent channel for this. But what are the regional drivers and changes that will further abet capital raising opportunities for fund managers in APAC?
Liberalisation in China
Despite the market volatility, China’s capital markets and funds industry have undergone major changes over the last two years. Assets in domestic public mutual funds have grown 10-fold in 10 years and now control $1.2 trillion. Chinese retail is biased towards domestic funds but foreign managers now have an excellent chance to raise mainland assets following passage of the Mutual Recognition of Funds (MRF) initiative in July 2015. MRF permits Hong Kong domiciled managers to raise assets from Chinese retail investors under their own brand name. It simultaneously allows Chinese managers to sell into Hong Kong. MRF now provides an alternative for foreign fund managers, to the set-up of a joint venture (JV) with a mainland partner.
Despite a slow start, MRF is gaining traction. Twenty-five southbound funds offered by 15 fund managers have been authorised by the Hong Kong Securities and Futures Commission (SFC) to sell into the jurisdiction. Meanwhile, three Hong Kong funds have been approved by China’s Securities Regulatory Commission (CSRC) with 14 in the pipeline. Data from China’s State Administration of Foreign Exchange (SAFE) indicates that in January 16’, $9 million has been raised by the few funds already active under the program, but this is likely to increase. Attracting Chinese investors will take time – many are used to investing through bank distributors (ICBC, CCB, BOC, ABC) and rarely into foreign funds. The operational and regulatory requirements for foreign funds in China can be onerous, but having the first mover advantage will ultimately pay dividends going forward.
Further liberalisation is to be expected. At present, only vanilla strategies can take advantage of MRF but there is nothing to prevent the initiative being extended to more sophisticated asset classes as regulators become more comfortable. Previous Chinese liberalising measures such as the Qualified Foreign Institutional Investor (QFII) initiative have gradually been made available to more countries. MRF will likely follow a similar path. Initial discussions to extend MRF are underway with a number of countries including the UK.
Asian Funds Passport
Cross-border funds distribution in APAC accounts for less than 15% of regional Assets under Management (AuM). This cross-border activity is dominated by UCITS with APAC AuM accounting for $200 billion or 5% of global UCITS AuM. This could potentially change as two regional fund passport schemes have entered the fray. The ASEAN Collective Investment Schemes (CIS) initiative has been in train since August 2014 and allows qualifying managers to sell products seamlessly into Singapore, Thailand and Malaysia. The second passport initiative – Asia Region Funds Passport (ARFP) – is expected to go live in 2017 and incorporates some of the largest Asian fund markets such as Australia, Japan and S. Korea which account for over $1 Trillion fund AuMs. Both have been modelled on European UCITS and will initially apply to vanilla strategies given their retail audience. However, UCITS are not allowed to participate in either ASEAN CIS or ARFP. Furthermore, China is not included as they are driven their own globalisation agenda.
Proponents of ASEAN CIS and ARFP argue these schemes could potentially usurp UCITS although this will take time given how embedded UCITS is in APAC. In the short-term, the disruption will be minimal as local funds do not yet offer the same breadth of products than UCITS. Also a number of challenges need to be overcome. Whereas the EU is a (broadly) harmonised single bloc, APAC is hugely diverse. Arbitrages over tax, regulation and wealth/economic development are substantial, and this needs to be addressed before these fund passports can flourish. Nonetheless, experts are bullish that these passports –especially the ARFP – will be successful in the long term and could prove to be a major disruptor.
Fund Distribution and Automation
Fund distribution in APAC is dominated by large banks, which account –depending on countries – for between 60% and 80% of distribution. Korea and Japan are the exceptions where securities firms play a greater role than banks in fund distribution. Distribution by insurance companies has remained stable standing at between 10% and 15%, while the role of independent financial advisers (IFAs) remains limited. The distribution model is evolving. Nowhere is this more evident than in China. Data from Z-Ben Advisors found that 76% of financial products distribution in China was undertaken by banks in 2007. In 2014, this stood at 26%. Online platforms are flexing their muscles and accounted for 64% of fund distribution channels in China in 2014, up from 13% in 2007, according to data from Z-Ben Advisors.
Mobile applications and D2C is becoming a massive distribution channel in APAC and it is something fund managers need to be cognisant of. Ant Financial has recently announced the launch of its own wealth management mobile application giving investors exposure to around 900 mutual funds. Such distribution is cost-effective and simple for an increasingly tech-savvy, wealthy and younger investor demographic. This embrace of technology is being pushed by governments and regulators alike. Korea and Taiwan’s governments have encouraged the development of D2C platforms; Fund Online Korea and Fund Rich respectively.
Fund automation in APAC is also growing at a phenomenal rate, and this has been primarily driven by message transaction network providers. Initial support for automation came from global fund managers, transfer agents and a handful of regional governments including Taiwan. Lately, however, interest has been stemming from local market participants. Countries like Australia, Taiwan, Singapore and Hong Kong have experienced significant increase of STP rates over the last 3 years. Calastone is sufficiently confident that the APAC cross-border fund market should reach European levels of automation by the end of 2016. We believe this trend will be reinforced by the influx of online platforms seeking more efficiency at low cost.
APAC is undergoing enormous change. Global fund managers and service providers with existing experience in cross-border distribution will have a significant advantage over local players. To remain relevant in this rapidly evolving technological landscape, domestic and global managers need to re-engineer and modernise their back offices if they are to accrue the distribution benefits going forward in the region.