Hurdles for Year of the Horse: No 3

AsianInvestor has set out to identify five key hurdles that asset managers need to overcome if they are to enter the winners’ enclosure at the end of Year of the Horse.

This is as much about positioning for future growth as it is about navigating near-term market challenges.

Over the next week we are revealing our selections in descending order of importance as we rate them. We picked cost control as our fifth-ranked choice, as reported, and fundraising as our number four pick.

At three, we have selected passporting. There can be few potentially more transformational developments in the region’s asset management industry than this.

Speculation over the launch of the Hong Kong-China mutual recognition scheme has been rife. It is understood some 35 funds are under consideration in the initial batch from a handful of houses.

Agreement has been reached between the two regulators – the Securities and Futures Commission and the China Securities Regulatory Commission (CSRC) – on the project’s scope, eligibility requirements, disclosure and investor protection.

Expectations are this is to start imminently. How about February 14 for launch day, Mr Alder and Mr Xiao (respective regulatory chiefs), the auspicious fifteenth day of the new lunar calendar and a Valentine’s Day gift for the asset management industry?

Moreover, implementation of an Asean passport is set for this year, while the Asia Region Funds Passport (ARFP) is to conduct a consultation this year ahead of planned launch in 2016.

The impact for fund houses promises to be material from a distribution and asset gathering perspective. Fund houses must decide whether to position for the scheme early or wait for regulatory clarity before committing resources. It is a puzzle for firms with large Ucits platforms, for example.

By getting these calls right asset managers can set themselves apart in the Year of the Horse and position for future growth. Of course, they also risk becoming lame if the schemes they commit to fail to ignite.

For our article we sought the views of a wide range of industry professionals including asset management CEOs, portfolio managers, institutional and retail salespeople, distributors, custodians, lawyers, consultants, recruiters and research analysts. Thank you for your input and we welcome your feedback.

3. Passporting
Last year was a landmark for the asset management industry in Asia Pacific, with three passporting initiatives proposed. Debate has swirled around which one will succeed, although it may be more relevant to ask if any of them will.

Asia has a low penetration rate for mutual funds, and there are doubts over demand. The fact that three mutually exclusive initiatives have been proposed underlines both competition between jurisdictions and the difficulty of regulatory coordination.

Timing-wise, the mutual recognition scheme between Hong Kong and China is expected imminently. Implementation of an Asean passport between Singapore, Malaysia and Thailand was also mooted for this year, while the Asia Region Funds Passport (ARFP) between Singapore, Korea, Australia and New Zealand is to conduct a public consultation this year ahead of planned launch in 2016.

Fund managers will be forced to make choices, not least those that have spent years rationalising product ranges around Ucits. But regulatory uncertainty makes this difficult.

First-mover advantage in the HK-China scheme would appear key, for example, but less so if Hong Kong-based subsidiaries of Chinese firms are permitted entry early on. These firms know China’s customers and product culture, their branding is established and they have existing distribution networks in the mainland.

For most international managers it will be about positioning for round two. Hong Kong firms need to weigh the costs and benefits of establishing local manufacturing and product, without assurances at this stage over the duration of this scheme’s exclusivity.

Recruitment of sales staff with language capabilities for distribution and servicing on both sides will also be required, and tie-ups with brokerages and even online distribution may need to be explored.

Investor education will be a challenge, and there are uncertainties over disclosure and investor protection. Enforcing rights against mainland institutions is notoriously difficult. How will the liabilities of fund firms differ to accommodate potentially three investor protection frameworks?

Much industry scepticism is reserved for the ARFP scheme, although logistically its jurisdictions are closest from a development perspective. Hurdles will include aligning tax regimes and transfer agency.