Andrew Gordon, RBC Investor and Treasury Services
The ARFP scheme, which was initially announced in 2013, aims to connect the mutual fund markets of Australia, Japan, Korea, New Zealand and Thailand, but it hasn’t been fully implemented yet. Japan and Australia have moved closest to full implementation.
Japan is the eighth largest fund market globally, with $1.66trn in assets as of the end of September last year, Gordon said, citing data from ICI Global.
The ARFP scheme provides foreign managers the opportunity to sell offshore funds in the Japanese market. However, domestic investors already have access to offshore investment products through “toshin funds”, which are locally-domiciled funds that feed into offshore funds, Gordon said.
“The feeder fund route works well, but there is an extra layer and that can bring additional expenses for the investor,” Gordon said.
Gordon expects ARFP funds to be a less expensive option because their structures are simpler and are easier to manage from an operational perspective compared to the feeder funds.
“Japanese retail and high-net-worth investors are comfortable and familiar with investing overseas, so ARFP could offer interesting opportunities to global managers.”
In Japan, the marketshare of overseas equity funds is bigger than domestic equity funds. As of the end of January, there were 758 overseas equity funds with ¥10.98trn ($101.9bn) in assets. The 658 domestic equity funds have about half the overseas assets (¥5.57trn), according to data from the Investment Trusts Association of Japan.
Japan is also home to a majority of Asia’s wealthy. As of the end of 2016, Japan’s high net worth individuals were top of the list in Asia-Pacific: 2.9 million HNWIs had $7.9trn in wealth, according to Capgemini data.
Compete against Ucits?
Fund passporting schemes are relatively new in Asia, such as the Asean CIS scheme, which started in August 2014 and connects the fund markets of Singapore, Malaysia and Thailand, and the Hong Kong-China Mutual Recognition of Funds (MRF), which launched in 2015.
For both schemes, traction has been slow, and both are not expected replace Ucits funds as the top choice for fund managers for cross-border distribution in the short- to medium-term, according to Leo Chen, Hong Kong-based managing director and head of Asia at Calastone.
“Ucits have been around for over a decade, and it has taken quite some time for them to become the everyday household type of funds for people to buy into,” he said at a recent webinar.
Ucits funds are available for sale in most Asian markets, with Singapore having the highest number of Ucits funds, followed by Hong Kong and Taiwan, according to 2016 data from the Association of the Luxembourg Fund Industry (ALFI), the latest figures available.
Number of Ucits funds in APAC (2016)
In 2016, the number of Ucits funds sold in Japan and Korea (markets included in the ARFP scheme) were significantly less than in Singapore. However, the year-on-year growth was in double-digits for both markets.
Positive outlook
Nevertheless, Chen remains positive on all passporting schemes in the region, especially when the ARFP comes into full implementation.
“The ARFP is going to increase the popularity of [locally-domiciled] funds,” he said. In addition, the various passporting schemes are supported by governments as they want to retain local talent and increase the knowledge and exposure of their local fund industries.
He added that passported funds have a “very local regional flavour”, which will provide clients more investment choices to supplement the available Ucits funds, which tend to be more global.
RBC’s Gordon added that some asset management firms with Ucits funds have also established locally-domiciled funds in the region. “So registration under the ARFP regime and distribution will be relatively simple.”
Asian managers that have strong investment capabilities may see the ARFP scheme as an opportunity to build scale.
“There are market commentators that are upbeat and positive about the ARFP, but none of the scheme champions see this as a short-term project. With the support from two of the top 10 investment funds markets globally (Australia and Japan), the ARFP is certainly in the running.”
However, as with all cross-border fund regimes, fund distribution will always remain the key challenge.
“Arranging the right distribution will be key, and that means finding the right partner,” Gordon said. “Some Asian markets are prone to higher volumes of trading activity, so identifying the right distribution channel to build a long-term business can sometimes be challenging.”
