Asia is moving closer to adopting a “passport” that would allow mutual funds to be sold across the region, in a move that would strengthen regional capital markets and mimic the UCITS system that has transformed European investments.
However the existence of three rival schemes to develop fund passports—mechanisms through which a mutual fund registered in one jurisdiction may be sold in another—is raising concerns.
If Asia were to be able to build a mechanism like UCITS, through which funds from one European state can be sold in another, Asian investors would have greater choice in their investments and Asian capital markets would be made more integrated and resilient. That, in turn, would reduce the need for local savings to flow out of the region to the west—adding stability to capital flows.
Last week the Monetary Authority of Singapore, Malaysia’s Securities Commission and Thailand’s Securities and Exchange Commission agreed to build a framework for cross-border distribution of collective investment schemes.
This followed an announcement in September at the APEC meeting in Bali of a similar initiative among Australia, New Zealand, Singapore and South Korea, which in turn followed an announcement earlier in the year of a mutual recognition platform for public funds between Hong Kong and mainland China.
The Hong Kong/China initiative is generally seen as being the most likely to succeed. “That looks very likely to occur before the end of this year, or the beginning of next year,” said Stewart Aldcroft, CEO of CitiTrust, part of Citigroup. “Frankly, the possibilities of participating in the Chinese market are so enormous that everyone should be trying to take that opportunity.”
According to Z-Ben, the China-based asset management analysts, the Chinese mutual fund industry had RMB2.45 trillion ($400 million) under management by 30 June, and the figure has been much higher in recent years.
“That’s after an extended period of dreadful performance,” said Aldcroft. “What would happen if we see products that do give a good return?” He believes a pilot programme will be tried for around 12 months before expansion, with membership granted to Taiwan within a further year.
The most recent proposal from the three ASEAN nations makes sense because of a history of cooperation between the three, but it features both a tight deadline – implementation in early 2014 – and onerous restrictions: funds must have a five- year track record and at least $500 million in assets to be eligible. It is also conspicuous for the absence of the Philippines and Indonesia, which are expected to join in due course.
The schemes may help harmonize markets and allow local money to stay in Asia rather than heading out to dollar assets. Speaking of the APEC idea, Singapore’s Minister for Finance, Tharman Shanmugaratnam, also the MAS chairman, said it would “ultimately help in the much-needed deepening of regional capital markets.”