How Thai mutual funds can build true cross-border platforms ______

Blog / 22 Jun 2021

Becky Chiu, Director - Client Relationship Management, Asia

It would be a shame if the Southeast Asian country’s top fund managers got hooked up on the negatives that arose from last year. With momentum to internationalise the capital markets in force, those who look outward will surely benefit from doing so. Here’s why.

It has been a challenging period for the mutual funds industry in Thailand. As the first wave of coronavirus made its way through Asia Pacific last year, the securities markets were not immune from its effects.

With a series of setbacks, ranging from investor redemptions and central bank interventions, it would be easy for the Thai fund management industry to fall into introspection. Some are anxious the events of last year could put a hold on some of the very exciting developments of Thailand’s mutual funds industry over the last 20 years.

One thing is clear: Thailand’s internationalisation of its capital markets is here to stay. Having gradually opened its financial borders which have allowed Thai mutual funds greater opportunity to invest in international markets, regulators are unlikely to make any fundamental changes to its plans. Driven by demographic need, the domestic securities markets are alone unable to supply Thailand’s ageing population with adequate savings opportunities.

Goodbye to internationalisation? Not a chance

In many respects the developments over the last year provide ample opportunity for the industry to further develop the necessary tools and policies to withstand external pressures.

Looking to how other international markets handle it is a good place to start. As is strong leadership from the market’s regulators. Reacting to last year’s fallout, Thailand’s stock exchange regulator, the Securities and Exchange Commission (SEC), has been working on revising its liquidity risk management criteria to prevent panic selling and any subsequent shocks, acting as a buffer for mutual funds.

The SEC, who recently closed its public hearing on the subject, is interested to cover two main areas: mutual funds design – ensuring they are in compliance with government investment policy and have appropriate tools to stress test liquidity – and the potential implementation of redemption conditions for investors to dampen investors’ appetite to rush to the exit doors.

Take responsibility

These approaches are sensible, but the onus is still very much on the mutual funds industry to develop the necessary skills and infrastructure to operate in foreign markets. Fund managers need to establish the resources to acquire and analyse data and decide which securities or instruments are both available and suitable for their needs.

Given the freedoms to invest abroad are relatively new, many fund companies in Thailand lack a deep network or the right partner in foreign countries that can support their investment needs. Some funds may opt to invest in existing foreign funds, piggy backing off existing expertise, but investors will be hit by the increased fees that come with this model. Over the long run, this may not be a sustainable option.

Again, the Thai regulator is proving proactive in this field. In only its third passporting agreement, the SEC announced in January it had entered a memorandum of understanding (MoU) with its counterpart in Hong Kong, the Securities & Futures Commission, on mutual recognition of funds. The MoU delivers the opportunity for fund companies to market to investors in the respective jurisdictions with far less red tape involved.

Thai fund managers will now of course have to compete on a level playing field with Hong Kong-based fund managers. They may also historically lack the connectivity into foreign markets, but now is the perfect chance for Thai managers to change their operational processes and build a diverse international network.

Get on the front foot

Now is also a good time for the fund industry to excite investors into looking abroad once again. Some Thai fund managers have taken on the mantle and are articulating well the need for serious investors to diversify their risk and look over a longer-term time horizon. Domestic political unrest troubled the Thai stock market early this year, only proving that placing bets all in one place is not a wise investment strategy.

Looking overseas, to markets such as the US and Europe, which are showing healthy recovery, could be the choice for Thai investors who are seeking higher returns and diversification. Given domestic investor appetite is skewed towards buying local Thai fixed income assets, it will require education to shift sentiment.

And that’s the key lesson: it’s up to the Thai fund managers to find new opportunities, conduct the appropriate investment analysis on their suitability for their client base. Sitting in money market funds or investing in local government debt will not cut it in the long run. Mutual fund managers need to generate a level of credibility, resourcefulness, and conviction to convince domestic investors to buy into the narrative.

A key component of this is for fund managers to deliver sustainable and exciting opportunities that cross-border investment can offer, both in terms of diversification and return. For this, fund managers must ensure they are able to connect to global markets as effectively as their international peers and can access the right mutual funds that match the needs of their domestic client base. Working with international partners with the transactional network to support fund managers in this pursuit would make perfect sense.

Rather than hide behind what has been a challenging year, it’s time for fund managers to get on the front foot work with regulators and industry experts and ensure the Thai mutual funds industry is able to withstand market shocks and offer credible and diverse investment opportunities for its investors. It would be a shame to do otherwise.

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