Thai central bank leads funds industry shake-up
Thailand’s central bank will liberalise its currency repatriation rules tomorrow (July 20) to encourage individual investors to remit up to $5 million annually offshore, in the latest in a series of measures by local regulators to break the hold of local banks and their asset management subsidiaries on the local funds market.
Late last year, Thailand's Securities and Exchange Commission (SEC) introduced new rules that allow foreign funds to be directly distributed onshore. The Bank of Thailand's new amendment is designed to complement this by encouraging local investors to invest more into offshore funds without having to get permission each time they do so from the central bank.
Rapee Sucharitakul, secretary-general at the SEC, told AsianInvestor that these moves should pressure local bank distributors, who hold 80% of the market share, to move towards an open architecture model. Presently local banks favour selling funds managed by their own asset management subsidiaries, providing limited choice to local investors.
The Thai mutual funds industry has total assets under management of some Bt4 trillion ($114.3 billion) including real estate investment trusts and infrastructure funds, equivalent to almost one-third of the country’s GDP. This excludes voluntary pension funds, which add around another Bt1 trillion. The vast majority of these assets are invested into local commercial paper, bonds and equities.
“On the surface it [the funds industry] may look like it’s well developed, but if you look deeper most funds are sold as deposit substitutes; a large portion are fixed income and money market funds,” noted Sucharitakul.
“The real active managers still represent a small part of the funds industry, a reflection of the peoples’ understanding of the industry itself,” he added.
Coupled with the low yield environment and the ageing population in Thailand, Sucharitakul said it was time Thai investors are provided with more choice in terms of fund types and fund performance.
Despite opposition from local players, the SEC announced in late 2015 that it would allow foreign investment funds to be sold directly onshore, giving international managers direct access to local fund distributors.
Previously foreign fund managers needed to work with local fund houses for the distribution of foreign funds via a feeder fund structure.
In February Citibank Thailand became the first distributor to take advantage of the rules change, working directly with foreign players such as JP Morgan and UBS to sell offshore funds locally.
Currency easing
The BoT’s coming amendment to local currency repatriation rules marks another big change to Thailand’s funds industry.
Up until today, local investors had to ask the central bank for permission each time they want to invest into offshore funds. It is believed that the new rule means individual investors invest up to a total of $5 million offshore via intermediaries without requiring BoT permission.
The reform removes one of the bureaucratic obstacles of investing overseas, making it easier for Thai investors to access a greater variety of funds including hedge funds, leveraged funds and unrated bond funds.
“What we’re trying to do is allow the industry to offer these types of funds in Thailand as well,” said Sucharitakul.
The SEC is currently drafting the rules to allow pension funds and high-net-worth investors to invest in hedge funds for the first time, as well as opening up public infrastructure funds to retail investors.
In January, the SEC also gave retail investors permission to invest in high yield bond and unrated bond funds, although they had to comply with a stricter diversification rule compared to professional investors. Retail funds cannot have more than 5% of their net asset value exposed to a single entity, whereas for institutional and high net-worth funds the limit is up to 25% of NAV.
“Once people are given a choice they can shop it here or go abroad, it would be up to them to make the decision. That will create a level playing field in this country because at the moment the funds in Thailand are pretty mundane,” noted Sucharitakul.
Local banks are obviously not thrilled with the changes, because of the extra competition they will have to face. As a result, the SEC is relying on foreign banks in Thailand to provide the catalyst for industry change.
“There are retail banks in Thailand that are owned by foreign banks and they might not necessarily have a large retail presence but they have branches in Singapore and Hong Kong in which they could use as a contact point to bring clients outside of Thailand,” said Sucharitakul.
“These banks could provide the market force for change. Investors usually have multiple banks and if an international bank in the country starts providing a variety of products this would put pressure on local banks to do the same because of client demand.
That’s the way the market will be going forward. There will be increased competition and more variety of products offered to clients,” Sucharitakul said.