Despite their proximity, in some ways the countries of the Association of South East Asian Nations (ASEAN) could not be further apart. The political and economic bloc, founded in the late 1960s, is home to 11 official languages, four major religions and more than 600 million people. They vary between socialist regimes, to an austere Islamic sultanate, to flourishing democracies. The members of ASEAN range from the world’s per capita richest nations, like Singapore and Brunei, to being among the poorest, such as Myanmar and Cambodia.
The most natural participants in the impending ASEAN funds passport framework are likely to be managers with a presence in at least two of the three countries – Singapore, Malaysia, and Thailand – initially involved in the framework.
In the latest iteration of its annual publication, Asset Management in Southeast Asia 2014, Cerulli Associates predicts an ASEAN funds passport will first and foremost suit the big boys.
"They seem best equipped to meet the criteria to be qualified operators – in particular, most seem to have no problem meeting the minimum assets under management (AUM) requirement of US$500 million," says Felix Ng, a senior analyst with Cerulli, who led the report.
Mr. Ng adds that it also makes sense for such managers to tap their regional presence to cross-carry products in order to broaden their product offerings in each market. For one, those with direct distribution infrastructure in the form of a tied-agency force will definitely benefit within such a framework. "This especially applies in Malaysia, where the tied-agency sales model is the most prominent among all markets," he notes.
Apart from managers with a regional presence, it is also likely that some large, domestic managers in Malaysia and Thailand will be looking to tap the framework as they see it as an initial step to target offshore clients.
"Some domestic managers typically view ASEAN as the primary step to reach out to an international client base, with clients in key regional markets such as Singapore and Hong Kong being their eventual targets over the longer term," says Yoon Ng, Cerulli's Singapore-based Asia research director. She cites the example of Malaysian managers viewing Shariah-compliant investments as a niche proposition they can offer to offshore markets.
Amid developments in the ASEAN funds passport scheme, managers could start to take Southeast Asia's potential seriously. The AUM for mutual funds in the region is expected to grow at a compound annual growth rate of 12% over the next five years, reaching US$503 billion in 2018 from $286 billion as of year-end 2013.
Not all plain sailing
Threatening to undermine this progress, however, is the familiar spectre of political instability, both in a domestic sense, as well as tensions with mainland China that have already simmered over. The possibility of conflict is not the only concern from its neighbour to the north, with slowdown in the Chinese economy also threatening to spoil the ASEAN party.
Will the progression of the US Federal Reserve’s scaling back of its bond-buying stimulus, and the potential for a rise in US interest rates further down the line, see investors heading for the exits?
“Cyclically speaking, ASEAN economies have varying threats and opportunities, ranging from politics, domestic credit and investments cycles, capital flows and liquidity. As long-term growth investors, however, we are positively inclined to most, if not all, of the ASEAN markets,” says Sam Rhee, co-lead portfolio manager, Asian equity, at Morgan Stanley Investment Management (MSIM).
“We believe that ASEAN as a region has the potential to grow above the overall emerging market trend growth of 4%; so relative to emerging markets, we would classify the whole region as a star performer,” he adds.
In a nod to enhanced investor appetite for the region, financial regulators in ASEAN have sought to cultivate the fund management industry. Under the Collective Investment Schemes (CIS) framework, fund managers within the region will be able to sell locally constituted authorised funds to investors in other ASEAN countries under a streamlined process. Perhaps predictably for the ASEAN members, consensus has come at a premium though, with only Singapore, Malaysia and Thailand so far jumping on board.
According to Jalil Rasheed, an investment director in Singapore with Invesco, the scheme will allow fund managers “to create products using a common framework and be available for sale across the region”. Again though, he does not believe that the benefit of the initiative will be felt evenly across ASEAN. “Singapore will likely emerge the winner here as their existing regulations are of international standards, and it is home to many global firms, making it easier to use an existing product and replicate it elsewhere in the region,” he believes. “Other ASEAN countries might need more time to study and recalibrate their existing businesses to adapt to these new harmonised rules which, in the past, they might not have adhered to.”
Given the nature of events regarding the political and economic outlook of the ASEAN countries, the question of the fund passporting scheme’s future direction is just one more conundrum for the region.