Fund passportability will benefit Asia-Pacific’s domestic players

11 December 2013   Category: News, Asia   By Hui Ching-hoo

Citi Securities and Fund Services talks up the prospect of fund passportability in the Asia Pacific region, expecting that the three passport schemes – the mutual recognition between Hong Kong and China; the ASEAN Framework for Cross-Border Offering of Funds; and the APEC Asia Region Funds Passport (APFP) – will kick off with a bang in terms of opening up more opportunities for local regional players.    

Steward Aldcroft, managing director and senior advisor, Asia Pacific at Citi Securities and Fund Services, notes that the three schemes will be implemented at different timeframes. For example, the APFP and the ASEAN cross-borders offering scheme are scheduled to be rolled out in 2014 and 2016 respectively, while mutual recognition between Hong Kong and China is expected to be launched by June of 2014. The three schemes will bolster the asset management industry in the context of recycling the savings in the region, tapping into emerging market wealth, influencing regulations, and developing the domestic financial industry as a whole.

Catherine J Simmons, managing director and head of government affairs, Asia Pacific at Citi, notes that the markets and their asset sizes will determine the responses from global fund managers. For this reason, she says, the Hong Kong/China mutual recognition scheme is the most immediately appealing. The four markets (Singapore, Australia, New Zealand, and Taiwan) participating in the APEC initiative also have substantial assets. With the participation of only three markets (Singapore, Thailand, and Malaysia), the ASEAN proposal at the moment has the least number of accessible assets. For regional fund managers the initiatives might encourage cross-border activity but there will be costs and infrastructure requirements.

According to Mr. Aldcroft, to benefit from the Hong Kong/China mutual recognition drive, there are several things firms can do. Firms can create Hong Kong domiciled funds, use local trustees, build a track record for the funds, and ensure their organisations can meet with the new criteria. There are benefits to be had by establishing Hong Kong local funds. They can be used in the mandatory provident fund (MPF) and can be brought to market quickly.

Mr. Aldcroft opines that foreign investors will find the mutual recognition scheme appealing due to its access to well performing small- and mid-cap equities in China. In the longer term, he expects QDII funds will be replaced by the cross-border funds because of the similarity of the products in nature.

However, Mr. Aldcroft suspects that only a small proportion of the existing 1850 SFC approved funds in Hong Kong will be eligible to access the mutual recognition scheme. Last year, he noticed a trend in which a number of asset managers re-domiciled their funds in Hong Kong as part of their plan to increase their exposure to the Mainland.

In regard to China, despite SFC Deputy Chief Executive Alexa Lam having previously noted that there will be a big pool of Mainland products tapping into the mutual recognition scheme, Mr. Aldcroft played down the size, pointing out that the Mainland market has many “me-too” products and the initiative mainly focuses on plain vanilla-type products.