In December last year, Hong Kong and Swiss regulators signed a memorandum of understanding that will enable cross-border retail sales of funds between the two jurisdictions, as reported.
Although Asia’s fund passporting schemes have had a weak reception, Remi Toucheboeuf, Asia head of products for asset and fund services at BNP Paribas Securities Services, believes the Swiss-Hong Kong link offers some points to consider.
Switzerland’s private banking assets are growing and are expected to reach $2trn by 2019, creating the need for more strategies, according to Toucheboeuf.
It is estimated that there are around 2,000 ultra-high-net-worth individuals in Switzerland, having wealth of more than $50m, according to Credit Suisse’s 2016 wealth report. In addition, around 750 of them have net worth exceeding $100m.
Swiss wealth managers already have a comprehensive choice of products. But he believes there is an appetite for locally-run Asia-focused strategies with an investment team that has a better grasp of local conditions than those outside the region.
“There is a need to have the right expertise because Ucits products are usually driven from a European perspective. But local investors are looking for diversification and are looking for a more Asian product,” he said.
Hong Kong domicile
Hong Kong firms applying to the scheme must have funds established, domiciled and managed in Hong Kong, according to a document from the Swiss Financial Market Supervisory Authority.
Funds that invest in real estate, precious metals or commodities or that carry out short-selling of investments and exceed the maximum borrowing limit of 10% of total net asset value are among those not eligible.
Toucheboeuf said that managers do not need to set up a Ucits fund, but they are required to employ Switzerland-based service providers and go through specific processes with lawyers.
The Swiss scheme has the potential to compliment the Hong Kong- China MRF, Toucheboeuf believes.
Hong Kong-domiciled funds selling to China have a cap on how much they can raise from Chinese investors – 50% of fund AUM.
“All the assets that you are able to gather from Switzerland are going to increase the size of your fund in Hong Kong. The more you will be able to gather from Switzerland, the more you will be able to distribute to China as well,” he said.
Interest in joining the scheme is low, according to Andrew Gordon, Asia managing director at RBC investor and treasury services.
His firm has talked to clients and the response has been that it is still too early.
“Interest for the scheme is uncertain as historically, a few Hong Kong-domiciled funds have raised money from global investors,” Gordon said. Hong Kong managers may have also thought of developing Ucits funds to sell to Swiss or European investors.
Swiss fund managers who could distribute in Hong Kong have the same low level of interest. Gordon said that when Swiss fund managers think about cross-border fund sales, Ucits is the preferred choice.
BNP’s Toucheboeuf acknowledged that funds under the Hong Kong-Switzerland MRF scheme would only be a second tier product as Ucits have a more global reach.
In Asia, Ucits funds account for around 65% of the combined AUM of funds in Hong Kong, Singapore and Taiwan, according to Toucheboeuf.
Fund passport fizzle
Asian fund passporting have not had much traction. The Hong Kong MRF has had mainly one-way flows dominated by a JP Morgan fund and regulators seem to have put a freeze on further approvals.
“Passporting arrangements in Asia have not been productive in terms of facilitating flow. Except for JP Morgan [which has dominated MRF flows], it’s just a sideshow of interest for everyone else,” said Guy Strapp, Eastspring Investment’s CEO, in a recent FSA interview.
The Asean passporting scheme between Singapore, Malaysia and Thailand has had far fewer participants, with only six funds that have been approved for sale from both home and host countries.
“It has been harder than expected to get the registration or approval [under Asean CIS] from both the host country and the country,” RBC’s Gordon said, adding that investors from these markets already have access to a diverse range of products.
A third scheme, the Asean Regional Fund Passporting programme hopes to include multiple Asian countries. But it has been under negotiation for years as the various jurisdictions have been unable to reach an agreement, especially on taxation.