Ucits may become superfluous, say CEOs

Asian CEOs have questioned the future of Ucits in the region in the face of proposed fund passport schemes, saying its days are numbered and will likely become irrelevant in some markets.

Speaking during a roundtable debate at AsianInvestor’s annual Art of Asset Management conference in Hong Kong yesterday, they acknowledged that Ucits had been successful notably in Hong Kong, Singapore and Taiwan.

“When first launched they filled a void of giving people [in Asia] access to markets that were not previously available,” said Lieven Debruyne, CEO of Schroder Investment Management in Hong Kong and chairman of the Hong Kong Investment Funds Association.

However, he is expecting Asia to enter a new growth phase, led by markets such as India, China and Indonesia. Further, he points to the three fund passport schemes proposed in the region this year as a driver for investors to turn to locally domiciled rather than Ucits product.

“It’s unlikely Ucits will be their vehicle of choice,” Debruyne said, noting that both the Hong Kong-China mutual recognition scheme and the Asean funds passport may prove to be interesting alternatives that could provide asset managers direct access into markets previously difficult to access. The other planned scheme is the Asia region funds passport.

“This will result in domestic structures becoming a bigger part of selling mutual funds,” Debruyne predicted. “This doesn’t mean Ucits will disappear, but will lose importance."

Alan Harden, Asia-Pacific CEO of BNY Mellon Investment Management, similarly surmised: “The days of Ucits are probably numbered."

He went on to describe the mutual fund recognition scheme between Hong Kong and mainland China as the nail in the coffin of Ucits, given the prospect of international firms being able to create locally domiciled funds to sell into mainland China. Eventually, he argues Ucits will become irrelevant in some markets while facing severe competition in others.

Of the three passport proposals, Harden is most optimistic about the HK-China alliance. “I’m not so convinced [Asean or ARFP] will work, that will take more political willingness [for the markets involved] to join together,” he suggested.

Mark Browning, managing director for Asia at Franklin Templeton, pointed to his expectation for growth in Asia. He noted that it took 10 years for the firm’s Italian branch to hit $1 billion in AUM, compared with just one for its Malaysian division.

“Across Asia there are traditional markets where mutual funds continue to grow, such as Taiwan, Singapore and Hong Kong,” he said. “The majority of excitement now is coming more from the institutional and wealth management [segments] than retail.

“The next exciting leg will be what will happen in markets such as China,” Browning said. “What will happen in Indonesia? What will happen in this transitionary period in Japan?”

Debruyne agreed, while stressing that the most established players were set to benefit from regional growth above newcomers. He cited regulation as one obstacle that new firms face.

“Mutual fund sales are difficult, and it’s becoming more difficult for distributors. Regulators aren’t making mutual fund sales any easier on a day-to-day basis. There are growth [opportunities], but they have to have quite an established business.”

He added that asset owners are becoming more sophisticated and tend to favour managers with scale and track record.

Jelle Vervoorn, chief executive officer of HFT Investment Management, noted that navigating Asia’s markets from a regulatory perspective alone can be a challenge, given different requirements in each country. Ultimately, many firms will end up questioning whether they can afford to have a presence in every country.

The debate eventually drifted onto Abenomics, sparking a difference of opinions between Harden and Browning.

Harden is a fan of the fiscal stimulus measures introduced by the administration of Prime Minister Shino Abe at the start of this year. A revival of domestic and international investor interest in the country has seen the Nikkei 225 become the best performing stock market in Asia this year, up 44%.

“Every investment manager had been underweight Japan,” Harden noted, predicting that now people will start to buy back in on an even bigger scale when Nikkei hits 20,000 to 25,000. The 225 index closed on November 19 at 15,164. (His views mirror those of Nikko Asset Management, which is unsurprisingly bullish on the scheme.)

But Browning is on the other side of the fence, questioning how Japan can escape two decades of deflation given its “horrible demographics and huge debt”.

“To service the existing debt takes up 70-80% of tax revenues,” he noted, “but if interest rates go up, how will they [continue to do that]?”

The only reason Abenomics appears to have legs is because of yen devaluation, he added. “But this will not make everyone else in Asia very happy,” he said. “The opportunity will be to help Japanese investors move out of the yen and into international currencies,” he said, suggesting this presents exciting opportunities for asset managers although not from a local perspective.