Asian Passports, the coming of age

64 Pages·2016·4.96 MB·English

Asian Passports,
the coming of age
An overview and its demand
Contents
The New El Dorado for Mutual Funds ............... 4
ASEAN CIS .......................................................... 6
Asia Region Fund Passport .............................. 10
Hong Kong and Mainland Mutual Fund
Recognition of Funds (“MRF”) ....................... 14
Countries Appendices ....................................... 16
Australia ..................................................... 18
China .......................................................... 22
Hong Kong .................................................. 26
Japan .......................................................... 30
Malaysia ..................................................... 34
New Zealand ............................................... 38
Philippines .................................................. 42
Singapore .................................................... 46
South Korea ................................................ 50
Thailand ..................................................... 54
Supporting your aspiration
into Asia Pacific ..............................................58
About PwC Asian Investment
Fund Centre ....................................................59
Thought leadership .........................................60
Contacts .........................................................61
2 Asian Fund Passports
Foreword
Asian Fund Passports are (almost) here! The However, it has not received an overwhelming
date to sign the Memorandum of Undertaking response as one would have anticipated. Asia
(“MoU”) for the Asia Region Funds Passport Pacific did also witness the launch of a third
(“ARFP”) programme has been a moving passport scheme, or rather, a mutual recognition
target. Still, this has only built the anticipation arrangement between China and Hong Kong
and opportunity for other economies to Mutual Fund Recognition (“MRF”) scheme
ponder its value and evaluate the cost/ this year in July, which is expected to be fully
benefit of participation. This was evident operational by the beginning of 2016.
with the announcement of Japan joining in
as a participating economy ARFP scheme in As the ARFP rules are being finalised and MRF
September this year. coming operational soon, this publication will
help portray the mutual fund market of each of
There is also another existing and functioning the participating economies of all three schemes,
passport regime in Asia, namely the ASEAN along with a high level understanding of the
Collective Investment Scheme (“CIS”). local asset management regimes.
Justin Ong Armin Choksey
Partner, Asia Pacific Director, AIFC Unit Leader
Asset Management Leader PwC
PwC
T: [phone] T: [phone]
E: [email protected] E: [email protected]
Asian Fund Passports 3
Asian Fund Passports
The New El Dorado for Mutual Funds
Development of Asia Pacific mutual funds AuM
Total AuM* in USD bn
As of June 2015,
standing USD
4.5 trillion from
Jun-2015
USD 3.2 trillion
4,510
in 2010, the Asia
Pacific mutual
CAGR**:
fund assets under
7.5%
management 2010
(“AuM”) have 3,263
grown at an
average annual
growth rate of * Australia, China, Hong Kong, India, Japan, Malaysia,
7.5%. New Zealand, Pakistan, Philippines, Singapore,
South Korea, Taiwan, Thailand
** CAGR: Compound Annual Growth Rate during the period
Source: PwC analysis based on ICI and local fund associations data
In this region where the individual wealth growth The increasing disposable income, growing middle
rate is a significant indicator and contributor to asset class and young educated population represents the
growth, it is timely for Asian Fund passports to go key stimuli for demand of mutual funds in Asia Pacific.
live in order to fill the gap between the supply and Over the next 30 years, it is estimated that over
increasing demand coming from the institutional and 1.8 billion people will move into cities and Asia-Pacific
the retail space. It is expected that Asia-Pacific’s share will contribute almost half of this urban shift. This
of High Net Worth Individuals (“HNWI”) assets will urbanisation trend and demographic shifts will see
increase to USD 22.6 trillion by 2020.1 a new investor group emerge in Asia.
Over the next 30 years, almost 1.8 billion people are expected to move into cities2
World population division by urban and rural, millions, 2000–2040
Forecast
10,000
9,000 8,571 8,801
8,309
8,012 Asia will
8,000 7,675 contribute
7,302
6,909 3,182 almost
millions 67,,000000 6,115 6,512 3,499 34,437%6 34,410%9 33,390%7 36% uhrablaf onf s thhiifst
pulation size, 45,,000000 35,247%8 35,314%6 35,402%2 34,487%8 46%
o
P
3,000
5,263 5,620 CAGR CAGR
4,900
2,000 3,824 4,176 4,536 59% 61% 64% 2000 – 2010 –
2,837 3,167 3,486 52% 54% 57% 2010 2040
50%
1,000 46% 49% Rural 0.4% -0.24%
Urban 2.1% 1.6%
0
2000 2005 20110 2015 2020 2025 2030 2035 20440
1,796m
1 PwC, Asset Management 2020 – A Brave New World
2 Sources: United Nations, Department of Economic and Social Affairs, Population Division, 2009 Revision; PwC analysis
4 Asian Fund Passports
Given the vast distances between the participating Despite some existing regulatory hurdles, this
economies and the rise of the digital age, the sustained growth is likely to continue and even
Asia Pacific region is ripe for exploring the use of accelerate in the coming years through the
digital platforms to reach a large and fragmented various passport initiatives. The current mutual
marketplace in a more effective and efficient manner. fund industry in Asia is however fragmented with
In addition, the future demand for mutual funds different tax and regulatory requirements from
in Asia Pacific will also be fuelled by local pension country to country and with no single coordinating
funds’ needs for diversification and the rise of digital regulatory authority. The distribution landscape
solutions embraced by Generation Y (people born in Asia is expected to evolve due to the passport/
after 1980) or “Millennials”. recognition schemes as the various countries mature
and find their natural places in the new world order
Asia Pacific pension funds are increasingly looking of fund distribution. These schemes will also give
beyond their borders to address their investment asset managers the opportunity to realise significant
needs. Overall, Asia Pacific-based pension funds economies of scale.
have invested an average of 19% of the region’s total
portfolio in foreign markets in 2008, and that has The fund passports also create opportunities or
now grown to 31% by 2014. Japan, the recent entrant an impetus for global asset management houses
to the ARFP scheme is among the most aggressive to set up manufacturing and distribution bases in
investor in foreign investments within Asia Pacific, this region. When we analysed the top 200 global
with Japan’s pension fund allocation to foreign cross-border asset management groups, only 29%
markets rising from 16% in 2008 to 32% in 2014. have a presence in at least one country of the fund
In order to invest abroad, mutual funds are an ideal passports economies, and 33% access the region
tool to provide pension funds with a substantial with UCITS funds. Asian fund passports will also
degree of liquidity, diversification and a very high enable the global asset management houses already
level of investor protection.3 With UCITS like in the region to increase their market share in this
framework of investment limits, diversification, region, particularly in those passporting countries
transparency, risk management, the ARFP and ASEAN which are currently not open to UCITS. This will
CIS would be an ideal investment route to take. improve their operational efficiency and is likely to
generate significant cost reduction.
In parallel, over the next decade, the average investor
base profile will change drastically as the millennials What does all of the above
assume a more significant role in the global economy. translate to?
Indeed, “millennials” are radically changing
investor demographics, behaviours and investment
Ultimately, we believe the Asia Pacific region will
expectations – they will account for 50% of the global
be a hotbed of activity and innovation for mutual
workforce by 2020 with significant savings power.4
funds. Will the identified impediments be fixed
This generation has been exposed to smart-phones,
tomorrow? Realistically, no - but with the demand
tablets, laptops and social media much more than
so compelling and the industry and national
any other generation and are attracted to instant
regulators eager to see it succeed, we expect to see
access to information. As they completely embrace
tremendous effort all around to address the various
digital solutions, they provide asset managers the
issues and impediments over time, as the success
opportunity to reach out to a much wider client base
of the fund passports is a success for all of asset
through digital applications. The Alipay, WeChat and
management in Asia Pacific.
Huoqi Bao success in China together with the SMS
and smart phone fund application portals in India,
have led to sky rocketing distribution and reach of
mutual funds in those countries.
3 PwC, Beyond their Borders: Evolution of foreign investment by pension funds, September 2015
4 PwC, Millenials at work, Reshaping the workplace, 2014
Asian Fund Passports 5
ASEAN CIS
The first fund passport scheme that has been in operation in Asia, is the ASEAN CIS. A bi-product of the ASEAN
(Association of South East Asian Nations) economic union, the ASEAN CIS went live on 25th August 2014.
Singapore is the best location to domicile your ASEAN focused funds
Laos Vietnam
GDP – $34.4 billion GDP – $510.7 billion
Population – 6,911,544 Population – 94,348,835
Myanmar Philippines
GDP – $90.93 billion GDP – $692.2 billion
Population – 55,167,330 Population –100,998,376
Thailand Brunei
GDP – $985.5 billion GDP – $30.21 billion
Population – 67,967,405 Population – 429,646
ASEAN: 634 mil pop
GDP(2041): US$ 6.3 trillion
Cambodia Malaysia
GDP – $49.96 billion GDP – $746.1 billion
Population – 15,708,756 Population – 30,513,848
Singapore Indonesia
GDP – $445.2 billion GDP – $2.676 trillion
Population – 5,674,472 Population – 255,993,674
Sources: CIA World Factbook (Population is July 2015 Estimates & GDP is PPP and is 2014 estimates)
ASEAN Economic Union (“AEC”) is made up of the programs of the Capital Markets initiative of
10 economies with varying degrees of economic AEC. However, only three economies have signed
prosperity. Economies focus and forte spans from up for the Collective Investment Schemes program
service sector to agrarian. Singapore being a so far. They are, Malaysia, Singapore and Thailand.
services-based economy; Brunei oil-based; Malaysia
and Thailand are fast industrialists; Thailand and The ASEAN CIS constitution and mechanics, though
Vietnam are big agricultural exporters; Indonesia not identical, has been inspired by the UCITS
and the Philippines are net food importers; and regime. For example, the investment diversification,
Cambodia, Laos and Myanmar are still agrarian eligibility and limits are more or less similar to
societies. The agenda of ASEAN is to transform UCITS but ASEAN CIS strictly prohibits stock
the region to a strong economic block, to build lending and repurchase transactions, stricter use
the region with free movement of goods, services, of derivatives and also prohibition of performance
investment, skilled labour, and freer flow of capital. fees. The registration process of CIS is as per the
UCITS III model, of applying to host regulators and
As part of its agenda to encourage free flow of not the UCITS IV model of peer-to-peer regulator
capital, the collective investment scheme is one of applications.
6 Asian Fund Passports
Key principles
Approved for retail • Legal structures approved for CIS offered to retail investors
offer in home country (i.e. Authorised scheme approved by MAS)
Qualifying CIS Operator Qualifying CIS Operator
Common
(locally regulated) (locally regulated)
standards
• Track record (5 years, • Track record (5 years,
imposed on
US$500m global AUM) US$500m global AUM)
Qualifying
• At least US$1m capital • At least US$1m capital
Manager,
• Competency & experience • Competency & experience
Trustee and CIS
• Delegation restrictions • Delegation restrictions
Annual compliance • Annual audit of the CIS Operator covering, at a minimum,
audit compliance with the Common Standards
Appoint local • Use of locally licensed intermediaries in host country
distributors and • May need to appoint a local representative
local representatives • Subject to host country requirements on offer of CIS
No performance fees No repo or SEC lending Limit on delegation
Similar to the UCITS regime, the ASEAN CIS outside of the 3 countries is permitted up to a
cannot be a feeder fund unless the master fund cap of 20% of the net asset value (“NAV”) only
is also within the ASEAN CIS programme. This where the foreign sub-manager is domiciled in an
would restrict the ASEAN CIS funds to be used IOSCO MMOU (IOSCO Multilateral Memorandum
as feeder funds and make it only a distribution of Understanding) signatory jurisdiction (e.g.
play by sweeping the market for capital using Luxembourg) and that manager is acceptable to
the foreign fund range or UCITS. This compels the Home Regulator. What would be needed to
the fund houses to constitute and manufacture be “acceptable”? That is not defined but broadly,
funds in the region. The other interesting point to for a Singapore authorised fund where more than
note, especially for foreign fund managers is that 20% of the scheme’s assets are sub-managed
delegation to a foreign sub-manager domiciled abroad, the regulator would consider whether
and regulated in Singapore, Malaysia or Thailand the sub-manager is reputable and supervised by
is permitted without restriction, as long as the an acceptable financial supervisory authority.
foreign sub-manager is subject to the same ASEAN Therefore, delegation rules are clearly more
CIS qualifications as the delegating manager. conducive to Asian products manufactured locally
However, delegation to a foreign sub-manager and not offshore.
Asian Fund Passports 7
ASEAN CIS
Delegation rules favour Asian product manufactured locally
Sub-manager domiciled Sub-manager domiciled
in SG, MY or TH outside SG, MY or TH
Singapore
Singapore
Luxembourg
Malaysia Thailand
Capped at 20% of NAV
Regulated by a Signatory to the Framework Domiciled in IOSCO MMOU signatory
Subject to CIS Operator qualifications country and acceptable to Home Regulator
As of date of this publication, there are only and Malaysia’s foreign currency regulations are tightly
11 funds from 5 asset management houses that have controlled, which poses a challenge to distribute
been approved by the respective home regulators. multi-currency share classes (non-Thai Baht and non-
Of these 11 funds, 5 are from Singapore, 5 from Malaysian Ringgit respectively) in these countries.
Malaysia and 1 from Thailand. Malaysian domiciled
funds are the only ones that have been approved by Both Thailand and Singapore are also offshore fund
Singapore as a host regulator. centres. Thailand did not have a robust offshore
fund recognition regime till the start of the ASEAN
Apart from the smaller domestic fund management CIS. Therefore, to-date many foreign fund managers
industry and slowly growing demand for mutual funds, distribute their products in Thailand through dedicated
one of the reasons for its slow start is that Thailand Thai feeder funds.
Million Baht # funds
4,000,000 1,000
900
3,500,000 861
800
3,000,000
700
2,500,000
600
2,425,970
2,000,000 493500
400
1,500,000
300
1,000,000
200
500,000 1,021,238
100
0 0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Jun-15
AuM Local IF AuM Foreign IF Number Local IF Number Foreign IF
Source: Investment Management Supervision Department, SEC, Thailand
8 Asian Fund Passports
Development of Asia Pacific mutual funds AuM under ASEAN CIS
PwC Market Research’s
projection of the ASEAN
CIS scheme would be a
growth from USD 226bn
in 2014 to USD 372bn by
2020 at an average annual
rate of 8.6%. What could
potentially accelerate
this scheme’s popularity
would be for more of
AuM of ARFP* in USD bn
the ASEAN economies
to participate in the
2020 Thailand
372 scheme. In particular, the
CAGR**: Indonesia market would
8.6% be a great potential for
2014 Malaysian Islamic fund
226 managers to export their
Singapore
CAGR**: Malaysia funds. However, this is
8.9% still an ongoing discussion
22000077
among the other countries
112244
and there have been no
indications or signs of
more economies showing
interest to participate in
Source: PwC Market Research Centre
**CAGR: Compound Annual Growth Rate during the period the ASEAN CIS for now.
Asian Fund Passports 9
Asia Region Fund Passport
The Asia Region Fund Passport has been the success of lobbying efforts of various industry stake holders
in the region and a few regulatory authorities.
The PwC’s Market AuM of ARFP* in USD bn
Research Centre
anticipates the Japan
2020
AuM of mutual 4,296
funds in the ARFP CAGR**:
7.0%
would grow at an
average annual South Korea 2014
Philippines 2,869
rate of 7% from
USD 2.9 trillion in CAGR**:
Thailand 3.0%
2014 to USD 4.3 22000077
trillion by 2020. Singapore 2,132247
Australia
New Zealand
Source: PwC Market Research Centre
**CAGR: Compound Annual Growth Rate during the period
In September 2013, finance ministers from Various studies, research and conversations with the
Australia, Korea, New Zealand and Singapore asset management industry point toward the support
signed a Statement of Intent on the establishment for a highly diversified and tightly regulated investment
of the ARFP. According to the Statement of Intent, fund product, one which would be the avenue for the
the ARFP aims to “facilitate the growth and growing mass affluent and middle income class investors
competitiveness of financial markets in the region in Asia Pacific to save for their future. The Asia Pacific
and the fund management industry, creating a fund industry is quite disproportionate in its development
common framework that has the effect of reducing amongst the participating economies, with Australia
the regulatory inconsistency and overlap faced by representing the fourth largest in terms of AUM in the
collective investment scheme operators seeking to world to Thailand and Philippines whose AUMs are not
offer CIS in multiple economies”. Over time this only smaller in absolute terms but also as a percentage
list has grown to include Thailand, Philippines and of their GDP. Traditionally in Asia, several economies
now Japan. A Passport Working Group (“Working restricted the growth of offshore funds in their economies
Group”) comprising of Australia, Korea, New by prohibiting their entry or making it untenable;
Zealand, the Philippines, Singapore & Thailand however now with the ARFP, the barriers to entry will be
has released two public consultation papers on the dropped so as to create a level playing field and a wider
Framework of the ARFP. With now seven economies choice for investors. The level playing field will provide
who have committed to the development of this an opportunity for fund managers to increase their AUM
scheme, the addition of more would accentuate in the region though better access, leading also to more
the success of this scheme. However, the program economies of scale.This was very aptly and statistically
did witness its first set back when Singapore voiced demonstrated in the ARFP study report of July 2014.5
its concern of tax discrimination not receiving In that report, it demonstrated that the increase in the
adequate attention, which led Singapore to defer AUM of funds in a few countries led to a decrease in the
its decision to sign the latest statement of intent in total expense ratio (“TER”) of up to 10bps in Australia,
September this year. 16bps in Singapore, 17bps in Korea and 12bps in Thailand.
5 APEC – Asian Region Funds Passport – A study of potential Economic Benefits and Costs – July 2014
10 Asian Fund Passports