Global investor demand for exposure to Asian assets is high and Asian asset managers are increasingly using UCITS as a vehicle to satisfy it. However, this is not without its challenges, especially for managers unfamiliar with local market practice and the nuances of investor preferences outside Asia. Alan Fong, Senior Product Manager, Asset Managers Sector and Riccardo Millich, Director, Business Development Asia and Europe-Asia corridors at HSBC, examine these challenges and outline how they can be best addressed.
Asian asset management growth
The growth in Asian asset management in recent years has been exceptional. Unsurprisingly, China has been leading the way, with mutual public funds passing USD3.5 trillion recently and reaching new all-time highs in doing so. Emerging markets in SE Asia – such as the Philippines, Thailand and Indonesia – are also showing signs of greater investment activity.
However, Asian fund managers are facing increasing competition for their domestic investors from three sources:
- International asset managers (often US based) attracted by the growth prospects of markets such as China
- Banks and insurers looking to leverage their existing brand and distribution channels and prepared to subsidise potentially loss-making asset management arms in their early stages
- Chinese home-grown tech giants looking to asset management as a sector to expand into (though typically more on passive or cash management products)
Collectively, this increasing competition is pushing Asian (especially Chinese) asset managers to seek growth outside their home countries and target investors elsewhere in Asia, Europe or the Middle East.
UCITS: the logical choice
There is clearly no shortage of demand for Asian asset exposure (particularly to China) from European and other global investors. Despite some recent headwinds, China remains core to international investors’ long-term strategies. In a recent Funds Europe survey, more than 76 per cent of respondents said that China’s strategic importance in their global investment strategies had risen over the past 12 months and 17 per cent highlighted China as ‘top priority’1. China also attracted USD163 billion in FDI during 2020, thus overtaking the US as the world’s most important FDI destination2.
In response to this demand, a growing number of Asian asset managers are establishing UCITS or EU domiciled alternative investment funds (typically in Ireland or Luxembourg) as part of a global distribution strategy that will deliver access to European investors who are showing a growing appetite for Asian strategies.
This approach makes considerable sense for several reasons. The UCITS structure offers important benefits as a vehicle for Asian managers entering Europe. It has a global reputation for being a high quality, well regulated and stable investment product with significant levels of investor protection. In addition, European investors prefer to invest in EU funds supervised by an EU regulator, because of the regulatory certainty/familiarity of Luxembourg/Irish UCITS funds versus locally domiciled Asian funds. UCITS also enables managers to sell back into Asia and other markets3, which reduces the regulatory burden, as well as offering appreciable cost efficiencies.
By contrast, non-EU funds will be difficult to distribute in the EU because of regulations such as AIFMD. By the same token, most Asia-domiciled funds are generally only available for sale in their home markets. Asia Fund Passporting schemes, such as the Asia Region Funds Passport (ARFP) that allow funds to be distributed cross-border within Asia, have yet to gain traction. Furthermore, regulators and lawmakers are still resolving key ARFP hurdles for investors, including harmonising tax treatments across participating markets and sorting out currency-related restrictions.
Distributing UCITS across the Greater Bay Area
One potential question mark over using UCITS to sell back into Asia is whether they would be classified as an eligible product for distribution in the Greater Bay Area under China’s new Wealth Management Connect scheme4. Under the current rules, only Hong Kong domiciled funds authorised by the Securities and Futures Commission will be available for sale directly to investors in the Greater Bay Area under the scheme. However, Hong Kong domiciled funds can potentially be structured as feeder funds feeding into an EU UCITS (the UCITS in this case needs to be authorised by the SFC), or as a fund of funds investing into underlying UCITS (from recognised jurisdictions only), subject to the Hong Kong domiciled fund maintaining a low to medium risk rating.
Challenges for Asian managers in Europe…
Despite the opportunity, Asian managers do face some challenges in Europe. A case in point is brand recognition: European investors tend to avoid funds that have a track records of less than about three years, especially if they are unfamiliar with the brand. Distribution can be complex, as channels can vary between different European countries, while UCITS are also under regulatory obligations to perform certain operational activities in Europe.
There is also the competitive aspect, with many long-established European or international asset managers already offering similar Asian investment strategies. However, on the upside, some European investors may feel that a local investment team based in Asia with a clear Asia focus has the edge over one based outside Asia.
…and how to overcome them
To maximise their competitive edge and build a franchise with European investors, Asian managers need to have a compelling narrative and differentiate themselves from large international asset managers by demonstrating their depth of understanding in domestic and regional markets. This is where the correct choice of securities servicing partner can spell the difference between success and failure. The right one will be able to share valuable market intelligence and assist in devising the optimal market penetration strategy that will gain brand recognition and visibility with European-based investors in key markets.
The right partner should also be able to introduce Asian managers to the best distribution partners who can offer in-depth local knowledge of the diverse distribution channels and investor behaviours in Europe, plus assist with the actual distribution.
Two common issues for Asian managers trying to enter Europe are dealing with time zone and language differences. Again, the right securities servicing partner will be able to provide local language support for functions such as transfer agency, NAV calculation and custody in the same time-zone (but where necessary with oversight and validation performed in Luxembourg and Ireland). This will ensure rapid same day responses to queries coming from either Asian asset managers or their investors.
There is high demand for Asian assets from European investors and a UCITS fund is the most established investment vehicle for Asian managers looking to satisfy that demand. This requires substantial support from a partner capable of servicing both the Asian and European requirements of launching and operating UCITS vehicles. Therefore, when selecting such a partner, key criteria will obviously include experience and expertise, but also the ability to execute a global operating model in a highly coordinated and seamless manner.
3 HK, Singapore, Taiwan, Korea are already big UCITS markets, as are markets in the Middle East (Israel, UAE, Qatar, Bahrain) and LATAM (Chile, Peru, Mexico)