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Why fund passport proposals are everyone’s business
(Pictured: Damien Barry)
Super funds and pension funds in the Asia Pacific region should not think that the various government “fund passport” initiatives – of which there are now several – are just of interest to fund managers. They matter for asset owners too.
Damien Barry, the Hong Kong-based senior VP and head of offshore fund services for Asia at State Street, believes that, over time, the vehicles for international investing will become homogenous.
“The (passport proposals) are relevant for all pension funds in the region,” he says. “As you look at the environment, there’s an expanding allocation offshore. Looking at the Australian market, there is a domestic focus and investors see it as being restricted by tax issues. But there are wider issues of demographics and the expansion pie. Everyone is looking to be more diverse.”
Australian investors have had a strong preference for domestically domiciled structures, primarily for tax reasons. An effective penalty is paid by Australian investors going into offshore structures, which impacts on performance. Korea also has a similar penalty. As a result, the UCITS funds, which are increasingly popular in Hong Kong, have had little or no traction in Australia. So, enter the passports…
State Street has been a particularly active participant in the passport proposals throughout the region, even though some senior State Street executives have misgivings – as do others at the other custodian banks – about the likelihood of success for these complicated governmental cross-border initiatives. It is time-consuming and largely thankless work by the custodians involved across all the committees. But the potential, for both managers and their investors, is significant.
There are currently five passport proposals:
1. The Asian Regional Funds Passport under the auspices of APEC.
2. A smaller grouping of Southeast Asian countries is working on the creation of a cross-border Collective Investment Scheme under ASEAN.
3. European governments and many international firms are pushing for greater acceptance of European UCITS products.
4. A range of special market access agreements, particularly involving China, is being pursued by many governments in the region.
5. Many APAC countries are trying hard to expand their domestic funds sector, which can result in slow acceptance of foreign funds and policy support for local managers.
State Street has published a white paper on the subject, as part of an international manager survey – and report on asset management prospects in Asia – and an Australian roundtable of managers held in August: http://www.statestreet.com/vision/assetmanagers
The Australian roundtable covered a host of issues, but the notion of the passports, inevitably, was raised. Australian managers have struggled to export their capabilities to the region. And, given the government-mandated growth of super, most Australian managers are happy to remain at home.
Barry says that Australian regulation and distribution tend to go hand in hand. Discussing how managers can “get around the region” leads to technology, which can help, platforms and passporting options, as well as peripheral discussions to do with individual agreements between countries.
“These are million-mile-high themes,” he says. “With the passports, the question is which domicile is likely to emerge as the leading one. Everyone needs to be in a scheme but we are probably 5-10 years away from a (solution).”
The potential savings of a workable Asia-region passport for managers are obvious: rather than launching five or six or more commingled vehicles in different jurisdictions, with the same underlying investment strategies, they will be able to do with just one, as the European-based managers do with their UCITS funds.
For the end investor, there should be more choice. For Australian super funds, their new member-directed investment options will be more user-friendly for international managed funds, not just ETFs – again widening choice.
Barry says that, at the moment, UCITS funds are the most scalable and efficient way to get around the region. But State Street is agnostic on the various other possibilities.
“As the passports come through,” Barry says, “there will be more specialized funds available. At the moment, about 90 per cent of assets are still in domestic product… There is room for improved harmonization. We’d like to help our clients with that.”
