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Lux association doesn’t fear local funds

The growth and proliferation of locally domiciled mutual funds in Hong Kong is not a threat to the popularity of Ucits funds, already widely used in the territory, argues Camille Thommes, director general of the Association of the Luxembourg Fund Industry (ALFI).
Lux association doesn’t fear local funds
Camille Thomes, Association of the Luxembourg Fund Industry

“The market share [of Ucits] is still significant compared to the local market, though it is understandable that Hong Kong, as an important financial market in the region, develops its local asset management industry,” Thommes told FSA on a recent visit to Hong Kong.

Locally domiciled funds are complementary to cross-border funds, he added, since both add to the number of investment choices available to investors.

The number of new Ucits funds for distribution in Asia grew by 4.01% in 2016, with Japan and Korea seeing a double-digit growth, according to an ALFI report. Among major Asian markets, the highest number of Ucits funds is available in Singapore, followed by Hong Kong and Taiwan. However, the number of Ucits funds authorised for sale in Hong Kong has declined.

Luxembourg-domiciled funds continue to dominate the mutual fund offering in Hong Kong, with 1,019 products accounting for 46% of the total number of funds authorised for sale at the end of June last year, according to data from the Securities and Futures Commission (SFC). However, the number grew only by 0.9% from June 2016, while the number of locally domiciled funds grew 8.6% to 745.

The growth in assets under management tells a different story. The assets in cross-border funds attributable to Hong Kong investors grew faster than the assets in Hong Kong-domiciled funds, according to data from SFC. For example, the AUM of Ireland- and Luxembourg-domiciled funds attributable to Hong Kong investors grew 29.7% and 15.4% respectively, while those in Hong Kong-domiciled funds grew 13.8%.

Source: Securities and Futures Commission

Ucits vs Asean CIS and ARFP

Fund managers based in Asia see the Ucits fund structure as a viable channel when expanding outside the region, according to Thommes.

“Asian investment houses are attracted to the Ucits brand because it allows them to get an international exposure outside Asia. When they set up a fund in one of the [European Union] jurisdictions, they can sell it within the whole Union.”

The success of similar local fund-passporting regimes in Asia, such as the Asean CIS scheme and the Asia Region Funds Passport (ARFP), has “remained modest”, Thommes said, based on the conversations he had with industry players.

Unlike Ucits, which covers many countries in the EU, the Asean CIS scheme gives access only to three markets, added Choi Ching Yng, ALFI’s Hong Kong-based head of Asia representative office.

The Asean CIS, which connects the fund markets of Singapore, Malaysia and Thailand, has not gained much traction since its launch in August 2014. So far, only six funds have been approved for retail sale by both home and host countries.

Meanwhile, 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.

Thommes said that although these schemes may give domestic investors in the participating markets more access to different products, local fund houses have already provided diversification by launching feeder funds.

Daniel Caleghin, head of wealth management strategy for Asia-Pacific at Casey Quirk, said in an earlier interview that he did not believe the region would create its own Ucits-type fund structure, which would enable fund sales across all regional markets.

“The window of opportunity for an Asian Ucits is behind us,” he said. “This would have happened before the global financial crisis or right when the GFC hit, as a crisis can create flexibility.”

In addition, Europe is well-suited for Ucits because it has the advantage of political integration, he noted. “We don’t have that here.”

Part of the Bonhill Group.