Distribution of Ucits in Asia - BNP Paribas Securities...

A research publication from Knadel and BNP Paribas Securities Services

Distribution of Ucits in AsiaResearch report

Managing editorsLisa Nevolo, Senior marketing manager, BNP Paribas Securities ServicesMiriam Edelman, Head of Knowledge, Knadel

ContributorsFranck Lambert, Head of marketing, BNP Paribas Securities ServicesAndrea Cattaneo, Head of asset manager client solutions, BNP Paribas Securities ServicesShany Venon, Asset manager client solutions, BNP Paribas Securities ServicesDean Lumer, Director, Knadel

Special thanksTina Wilkiinson, Global head of consulting relationships BNP Paribas Securities Services

Table of

contents

Executive summary

Introduction: the search for gold in Asia

‘Gold in them thar hills’: the market

The gold standard?

Other seams to mine: options?

Challenges of global distribution

Prospects

Conclusions

Bibliography

About Knadel

About BNP Paribas

06

10

14

36

60

42

46

52

64

68

72

Executivesummary

Asia is an attractive market for distribution of Ucits funds, and is often seen as the newest gold rush. To learn more, we surveyed fifty asset managers from Europe and Asia (and elsewhere) to hear of their experiences with distribution of Ucits in Hong Kong, Japan, Malaysia, Singapore, South Korea, and Taiwan.

The reportWe supplement the findings of the survey with additional analysis from investigative research in our discussion of these topics:

■■ Each of the six markets

■■ The evolution of Ucits in the region

■■ Advantages and challenges for the Ucits brand

■■ Relative merits of options other than Ucits

■■ Challenges of distribution: culture, strategy, and operating model

■■ Prospects for the future

Nuggets of goldThis research and investigation has illuminated several important points.

■■ The market is stratified:

■■ The three established cross-border fund centres – Singapore, Hong Kong, and Taiwan – have had the greatest success with Ucits, leveraging experience, infrastructure, and network effects from many asset managers and a large talent pool.

■■ ‘Emerging’, smaller, and/or less mature markets such as Malaysia and South Korea present highly individualised political and regulatory challenges. South Korea has recently created a less favourable environment for foreign funds in an effort to promote the local industry.

■■ Japan remains ‘inward focused’ and largely resistant to Ucits, but increasing their appetite gradually.

■■ The growth of Ucits in these markets has evolved to become the most popular offshore fund product. Ucits represents a gold standard of regulation and investor protection. Success has brought some counter-reaction, in concern about ‘Newcits’ using alternatives, moves to strengthen investor protection, and in some cases discrimination in favour of local asset managers. Despite some slowdown in approval processes, fund flows and interest in Ucits remains high.

7

8

(Comments in quotation marks are from participants in our survey.)

■■ China does not permit distribution of Ucits directly, but Chinese asset managers are among the vanguard of Asian managers creating their own Ucits, for distribution at home, in the neighbourhood and globally – including in Europe.

■■ Ucits has been a success story, but it has challenges.

■■ Even within Europe the ideal has not been reached, and in the more fragmented arena of Asia, localisation remains critical. Ucits is a passport, but it is not multiple citizenship.

■■ ‘Newcits’ using alternatives are a boon in Europe but a bane in Asia. Regulators are scrutinising new requests for approvals more.

■■ Multi fund structures like master-feeder or umbrellas are not favoured in several of these countries, which undermines economies of scale.

■■ Are there better alternatives for asset managers in Asia? We looked at:

■■ Local funds, but these are not necessarily a shortcut; cultural challenges are great in this approach, and this abandons any hope of cross-border synergies and economies of scale;

■■ Non-Ucits International funds, such as from the Cayman Islands, but these may face even greater scrutiny without the Ucits hallmark, and so probably are not any easier or less expensive; and

■■ ETFs, but this is really a different business, and not really a solution.

In the end, Ucits remains the best alternative for distribution of funds in Asia.

■■ Hong Kong: ‘Hub country’, access to China. Distribution through banks. Recent incidents sparked concern about Newcits, some slowing of approvals.

■■ Japan: Domestic onshore funds heavily favoured; burdensome approval process. Considered easier to create a domestic fund then use a Ucits.

■■ Malaysia: Small and growing market; distribution by platforms and banks, high consumer interest. Development of Islamic Ucits.

■■ Singapore: ‘Most user-friendly major centre in Asia’; variety of distribution. Some assets must be managed locally.

■■ South Korea: ‘Significant market potential’. Initial popularity, more recent discrimination; also union unrest and issues with convertibility of the currency. Distribution primarily via brokerage and banks.

■■ Taiwan: ‘Business opportunities and local demand’. ‘Ucits are widely recognised’, but strict regulatory requirements for approval.

Executive summary

9

■■ Prospects are good. The economic outlook is strong, and while regulation will continue to be rigorous, Ucits still enjoy privileged access. Ucits themselves may address some of the challenges, including restricting some alternatives, but the Ucits V directive appears unlikely to affect Asia. And while there is much talk of an Asian passport to compete with Ucits as a cross-border product, it is unlikely to develop any time soon.

■■ The biggest challenge to European managers is the continuing rise of competition from the local asset management industry.

■■ Our research and investigations have identified four pillars for success:

1. Cultural understanding and adaptation

2. Operational strategy

3. Choosing good partners, whether to acquire, form partnerships, or work with as service providers, to gain access to expertise and entrée to local networks

4. Designing fit-for-purpose operating and service models

The most important tool an asset manager needs is knowledge. Prospectors need good guides. Experienced service providers like BNP Paribas can leverage their global experience in fund engineering to help asset managers succeed.

Introduction: the searchfor gold in Asia

11

The search for gold in AsiaAsia as a new market for distribution of investment funds has become almost a gold rush. The relative buoyancy of Asian economies and the potential for significant new business is immensely attractive.

■■ European asset managers with an established foothold in Asia are often considering expansion;

■■ Asian managers are looking to spread their reach; and

■■ Europeans who may not have ventured into the territory are beginning to explore.

There is no question that rewards await. But just like gold fever, while there is truth behind it and genuine opportunity, the full picture is more complex. Those prospectors who strike gold will be those who come prepared, find good partners, and understand the risks and intricacies.

Much of the gold rush hype has centred on Ucits (Undertakings for Collective Investments in Transferable Securities). Is Ucits the key to unlock the potential of Asia?

■■ Ucits extending from a European passport to a global one

■■ Marketing success in regions outside of Europe – Latin America, Asia

■■ First truly global fund product

■■ Familiar to regulators

Hallmark of the Ucits brand:

12

To look behind the excitement, BNP Paribas teamed with Knadel, a specialist consultancy to the investment management industry, to embark on a research study into distribution of Ucits in six countries in particular:

■■ Hong Kong

■■ Japan

■■ Malaysia

■■ Singapore

■■ South Korea

■■ Taiwan

■■ Stability■■ Cost effectiveness■■ Investor protection

■■ Investor choice■■ Transparency■■ Robust regulatory framework

Introduction: the search for gold in Asia

13

Firms who responded to our survey are based in

we surveyed the Full spectrum oF asset managers by size in aum

Key:EuropeAsia Other

70%

18%

12%

Key:Small/boutique/local/hedgeMedium/regionalLarge global

39%

31%

30%

We solicited the views of fifty asset managers based within Europe and in Asia to learn about their experiences, and gathered information from other industry experts and sources. This report shares what we’ve learned.

Inside■■ ‘Gold in them thar hills’ The market, its evolution, and profiles of

each country■■ The Gold Standard? The story of Ucits, and its challenges in Asia■■ Other seams to mine? Alternatives to Ucits distribution, pros and cons■■ Challenges of global distribution, in culture, operational strategy,

and operating model■■ Prospects for the future

BNP Paribas and Knadel analysis


15

‘Gold in them thar hills’:the market

16

‘Gold in them thar hills’: the marketThe Asian market can be categorised as having three distinct groups:

■■ Current global and cross-border centres displaying a clear appetite for Ucits products. This group includes Singapore, Hong Kong and Taiwan, who together account for the bulk of Ucits consumption. These centres have a distinct advantage in experience and infrastructure to support distribution, and the network effects from the presence of many asset managers and a large talent pool.

■■ ‘Emerging’, smaller, and/or less mature markets such as Malaysia and Korea, which present their own highly individualised political and regulatory challenges to the Ucits success story.

■■ Mature ‘inward focused’ markets like Japan which are largely resistant to the product but increasing their appetite gradually.

Asia could almost be viewed like the fragmented Europe of 25 years ago, before the harmonisation of Ucits occurred. While there are cross-border institutions, such as ASEAN (Association of Southeast Asian Nations) and EMEAP (Executives’ Meeting of East-Asia and Pacific Central Banks), without a recognised over-arching structure, or incentives to conform, such harmonisation is unlikely.

The market in our six countries of interest is generally characterised by:

■■ High savings rates

■■ Low market penetration for funds

■■ Strong aggregated growth and resiliency of fund flows

■■ Traditional preferences for cash, and investing at home – in property, or the family business

Evolution: the beginningThe Ucits market has evolved quite rapidly in the area from the first approval in Hong Kong in 2005. As expected the established offshore fund centres, and more mature markets, were first to open to Ucits, so in addition to Hong Kong, we saw direct investment into Ucits in Singapore, Taiwan, and Japan. In addition, South Korea joined this list, and Ucits proved popular there. In a second stage of development, indirect investment via feeders began, particularly affecting Malaysia.

■■ Gold standard of quality■■ Dublin and Luxembourg as international Ucits domiciles:

■■ Capital gains treatment■■ Centres of excellence

■■ Service provider expertise


17

Growth in Ucits distribution continued apace, to a point where most offshore funds in Asia originate in Europe. In the established offshore environments (Hong Kong, Singapore, Taiwan), Ucits represent at least a majority of fund sales; they are a significant presence in the other countries. Industry experts widely acknowledge that Ucits have proved far more popular, by fund registrations and asset accumulation, than those of any other domicile, including the Cayman Islands and Channel Islands, or US mutual funds.

Although the perception of Ucits as a gold standard for quality of regulation and investor protection is one explanation for their ready acceptance in these countries, it is important to acknowledge the work of Dublin and Luxembourg in positioning themselves as international standard-bearers for exporting Ucits. The advantageous treatment of capital gains in these domiciles is significant. The aggregation of talent, resources, knowledge and experience in these locations is equally important.

Another factor supporting Ucits development in Asia has been the role of experienced service providers such as BNP Paribas. These institutions have long established experience not only working with Ucits, but also in the process of cross-border distribution as funds have navigated the waters in different countries across Europe. Service providers are able to export these skills in fund engineering to meet local expectations, so that their clients have expertise at their side in the expansion to Asian markets.

Counter-reactionThe evolutionary growth of Ucits distribution has not been completely smooth, however. The backlash has not been huge, but the gold rush has slowed, with increased regulatory scrutiny and longer delays in getting funds approved.

■■ Scandals particularly affected Hong Kong, but affected many countries, making investor protection a much higher priority. We are beginning to see introduction of regulations resembling MiFID and RDR in these jurisdictions.

■■ Regulators are increasingly suspicious of the expanded remit in instruments and strategy allowed for Ucits, somewhat diminishing their golden aura in a region where these are viewed as unsuitable for most investors. ‘Newcits’ have been a boon for Europe, but a bane for Asia.

■■ South Korea is the best example of a counter-wave of protectionism against Ucits as foreign interlopers, but they are not the only ones who wish to prioritise their local asset management industry. Disincentives, discriminatory tax and regulatory treatment, and more rigorous or simply slower approval processes have resulted.

■■ Mini bond and other scandals■■ ‘Newcits’ and fear of alternatives■■ Protectionism

A positive development has been the adaptation of Ucits as an Islamic product, tapping another aspect of the Asian market. Of the six countries studied here, this is apparent most obviously in Malaysia, where many Islamic funds have been developed with success.

Rising to walk erectThe next wave of evolution has seen the inevitable rise of Asian asset managers launching and distributing of their own Ucits funds. This generally happens in stages:

■■ Initially for domestic distribution in the manager’s home country

■■ Later for cross-border distribution, generally bilaterally or in small groups of countries, to other Asian countries

Asian managers are taking their rightful place at the table even where protection of the local industry is not strong. Partnerships and joint ventures with Western firms have sometimes aided the transfer of knowledge in this process, but not exclusively.

The agreement of the ASEAN Standards and Plus Standards towards an Asian passport to compete with Ucits can be seen as part of this trend. While a true passport seems a distant prospect, for reasons discussed later in this report, the conversation is part of the maturation process for the industry in this region.

As Asian managers flex their muscles, competition between countries is also increasing, and not just between traditional rivals Hong Kong and Singapore. Local market protection can be used to fend off other Asians as easily as Europeans.

The next wavesThe evolutionary process is heading in two directions:

■■ Asian managers bringing offshore funds home into a domestically regulated onshore regime

■■ Asians exporting their distribution of Ucits into Europe and other parts of the world

Domestic regulation can bring advantages in distribution as well as to the interests of governments seeking to advance local industry. We expect to see some Asian managers who created Ucits move towards establishing onshore Ucits-like domestic funds, and even converting their Ucits funds to bring them onshore.

Asian managers are beginning to take the fight back to their competitors with distribution of their own Ucits into the back gardens of the European managers coming to Asia. The neutrality of Luxembourg and Dublin simplifies the process and offers to level the playing field. Like the experience of US managers coming to Europe, though, the hurdles of connecting with local distribution networks and engineering funds to meet European needs will be obstacles for these Asian exporters. Their firms will face the same cultural and operational challenges discussed here, in reverse.

18


Picturing the marketThe following graphs show the relative sizes of these six countries in terms of net assets, number of registered investment funds, and number of management companies, and the percentage of offshore funds as a percentage of the market in Hong Kong, Singapore, Taiwan, and South Korea. This data has been compiled from multiple sources, including investment industry associations and government data in each country.

Market view

net assets (million €)

Funds

Taiwan*

South Korea

Singapore

Malaysia

Japan

Hong Kong

0 200,000 400,000 600,000 800,000 1,000,000

106,506

125,369

838,643

63,648

569,179

901,210

Taiwan

South Korea

Singapore

Malaysia

Japan

Hong Kong

0 1,000 2,000 3,000 4,000 5,000

1,621

3,390

4,062

605

3,778

1,944

*Taiwan reporting offshore companies only

19



Survey view

Our survey participants reflected the market in general in the places where they are choosing to distribute Ucits, or planning to do so soon, as shown in the graph below:

management companies

oFFshore Funds as a percent oF the market

Taiwan*

South Korea

Singapore

Malaysia

Japan

Hong Kong

0 30 60 90 120 150

75

60

107

41

74

67

Taiwan South KoreaSingaporeHong Kong0

20

40

60

80

100 94%

82%

63%

14%

Taiwan Malaysia JapanSouth KoreaSingaporeHong Kong0

20

40

60

80

100

74%

51% 54%

20% 23%31%

*Taiwan reporting offshore companies only

percentage oF respondents distributing now or soon

20





Hong Kong

About the market

Hong Kong has long been a major international fund centre and has been a strong supporter of Ucits, even with the current hesitations. More of the participants in our survey distributed in Hong Kong (74%) than in any of the other jurisdictions.

Here are some of their comments about the attractions of Hong Kong:

� ‘Hong Kong is the hub country in APAC’; Asian financial hub’; ‘major decision-making centre in Asia’

� ‘English speaking’

� ‘Friendly regulation’; ‘Ucits are widely recognised by HKSFC’

� ‘Market open to foreign managers’

� ‘Gateway to Asia Pacific region and in particular to China mainland’; Access to North Asia’

� ‘Good network of investors and service providers’; ‘Asset management expertise is easily located in Hong Kong’; ‘Linkage to Global Financial Institutions who have significant business in Hong Kong’

� ‘Size/sophistication of market’; ‘Well developed financial market’; ‘Seen as sophisticated market, good size, local expertise and centre for global networks’

� ‘No capital gain tax in Hong Kong’

These firms tended to be well established, and satisfied with their experience.

how long have you been distributing ucits in hong kong?

Key:This is our first yearOne to three yearsOver ten years

9.1%

27.3%63.6%

21


The Hong Kong Investment Fund Association recognises 67 management companies with 1,944 funds, representing assets of €901 billion. The Association readily provides clear market statistics. Fully 94% of funds are offshore.

Distribution, approval, and other challenges

As confirmed by 72.7% of our participants, distribution takes place primarily through banks, followed in importance by certain financial advisors; platforms are beginning to play a role. One participant noted the role of ‘institutional asset consultants’.

hong kong: has your experience met your expectations?

Key:Yes, metOnly partiallyBetter than expected in some waysExceeded expectationsNo

45%

18%

9%

27%

The approval process covers both the manager and fund; custodians must also be approved. A local Hong Kong Representative must be appointed, and a Hong Kong Covering Document submitted for approval. Regulators prohibit charging marketing expenses to the fund, and have begun to require investor characterisations as a further investor safeguard; there is considerable suspicion of alternatives. There are strict rules about acceptable advertising.

what have you Found to be the most important distribution channels in hong kong? choose all that apply

Direct toinvestor

Privatebanks/wealth

managers

Pension funds Financialadvisors

Insurance Retailbanks

Other (pleaseelaborate?)

0

20

40

60

80

100

18.2% 18.2%

45.5%

54.5% 54.5%

9.1%

72.7%

22




The approval process has slowed markedly of late in response to the financial crisis and incidents with Ucits funds which may not have been adequately vetted. What used to be a six week process can now take over a year, with inconsistency and a lack of clarity creating considerable frustration.

According to our survey, the main challenges faced by our participants are ‘time and/or cost to register and gain local approval’ followed by ‘local registration processes’.

what challenges have you encountered in hong kong? choose any that apply

Timezones

Legislationand

regulation

Licenses Timeand/orcost toregisterand gain

localapproval

Distributionchannelsand waysof doingbusiness

Localregistrationprocesses,

fundprospectus

requirments

Administratorsand serviceproviders

Culturaldifferences

and client-service

requirements

Other(please

elaborate?)

0

20

40

60

80

100

33.3% 33.3%

8.3% 8.3%

66.7%

41.7%

16.7%

8.3% 8.3%

‘Other’ challenges participants noted included ‘the tyranny of distance’ and an operating model in which Hong Kong funds are serviced from an Asian centre or Australia.

23


Japan

About the market

Only 23% of our respondents distribute Ucits in Japan, reflecting general market trends which heavily favour domestic onshore funds in this market. Use of local funds and a lack of business interest in establishing Ucits distribution (‘other’ in the graph below) were cited as the reason for avoiding Japan as often as ‘legislation and regulation’.

24


why is Japan not oF interest to you? choose any oF the Following Factors, and Feel Free to add your own reasons

Insufficientprojected

profitability

Legislationand

regulation

Tax rules Licenses Timeand/orcost toregisterand gain

localapproval



fundprospectus

requirments

Accessand

contracts

Culturaldifferences

and client-service

requirements

Other(please

elaborate?)

0

20

40

60

80

100

9.1%

45.5%

18.2% 18.2% 18.2%

9.1%

18.2%

27.3% 27.3%

45.5%


However, despite a continuing subdued environment for investing in Japan, assets under management have been on a growth trend since 2002, and penetration of funds is quite low, at under 5% of personal financial assets per Boston Consulting Group. Despite the trauma of the earthquake and its aftermath in 2011, fund flows remained resilient, and, according to Nomura Research Institute, ‘the asset management industry’s overall operating margin improved largely due to a regulatory change [permitting distribution of simplified and abridged prospectuses, saving printing costs] in addition to companies’ individual efforts to boost profitability’.

Because local investment opportunities remain subdued, funds may be seen as an opportunity to gain global exposure and diversification. There is also some welcome thawing of the rigid distribution structures that have proven a barrier to entry for outsiders in the past.

The Investment Trusts Association, Japan (JITA) lists 74 management companies of funds, 3,778 funds, and total net assets of €569,129 million.


Distribution is primarily through banks and security companies, generally affiliated or part of banks for 59.38% of the market. Registered financial institutions distribute another 39.58% of publicly offered funds, with direct marketing responsible for only 0.59% of sales (also based on data from JITA).

Registration is very slow and cumbersome, with legal filings of 50 to 300 pages per fund required to register and then the same re-submitted annually. The fund must be similar to a Japanese domestic investment trust, with limits on commodities and commodity derivatives. Umbrella structures are not allowed. A Japanese resident must be appointed as legal representative, and the courts of Japan have jurisdiction. The regulator’s Selection Standards often necessitate substantial changes to all fund documents, which then require home country regulator approval as well. It has been widely considered, and participants in our study agreed, that it is much easier to create a domestic fund from scratch in Japan, since the modifications the regulator typically imposes may require virtually doing so anyway.

The Japanese asset management industry is nonetheless quite mature and sophisticated, and Japanese managers are among the few in the countries studied who have established a presence outside of Asia. Nomura is listed in the top 25 non-European asset managers operating in Europe.

25

Malaysia

About the market

Malaysia’s asset management industry is perceived as relatively sophisticated if small, with a diverse range of local funds, including significant manufacture of Islamic shariah-compliant investment vehicles. There is fairly high market penetration for the region. Ucits have been used within local wrappers, but may also be approved directly.

Only 20% of our respondents are distributing Ucits in Malaysia or plan to start.

The Federation of Investment Managers Malaysia (FIMM) shows 41 member organisations with 605 approved funds, 167 of which are Islamic. Net assets total €63,648 million. This represents 19.7% of total Bursa Malaysia market capitalisation, and continues a growth trend in fund assets. The net asset value of the Islamic funds is 11% of the total. There are 15.5 million accounts, of which 2 million are Islamic. Statistics are readily available.

Malaysians differ from some neighbours in the region in their propensity for high levels of household debt. This is accompanied, however, by expanding household financial assets, and a continuing trend of increasing employment and family income. The government is targeting the debt burden with prudential lending measures, particularly as much of it comes from potentially consumer unfriendly sources other than banks.


Platforms such as fundsupermart.com have become popular as a source of distribution in addition to banks, financial advisors, and non-bank financial firms.

‘Other priorities’ or use of domestic funds is the explanation of 50% of participants for their lack of interest in Malaysia, as shown below.

why is malaysia not oF interest to you? choose any oF the Following Factors, and Feel Free to add your own reasons

Insufficientprojected

profitability

Legislationand

regulation

Tax rules Licenses Distributionchannelsand waysof doingbusiness

Accessand

contracts

Culturaldifferences

and client-service

requirements

Other(please

elaborate?)

0

20

40

60

80

100

10% 10%

40%

30%

50%

10% 10% 10%

26



Singapore

About the market

Singapore, the Luxembourg of the East, is a well established international fund centre, where Ucits are familiar and well accepted. Respondents in our study characterised Singapore very positively, telling us that 51% of them chose to distribute there for reasons including:

� ‘Most user-friendly major centre in Asia’

� ‘Size/potential of market’; ‘Business opportunities’; ‘Significant market potential and presence’

� ‘Extensive network of contacts’; Access to Global Financial Institutions’

� ‘Access to South East Asia’

how long have you been distributing ucits in singapore?

Key:This is our first yearOne to three yearsFive to ten yearsOver ten years

22.2%

33.3%

11.1%

33.3%

singapore: has your experience met your expectations?


33%

33%

33%

27



The Investment Management Association Singapore (IMAS) does not readily provide market statistics, but does offer a Lipper portal for information on individual funds. There are 4,062 funds registered in Singapore from 107 management companies, with a net asset value of €838 billion.


Funds are distributed through banks (55-60%), insurance (25-30%), and independent financial advisors (10-20%). Our participants saw financial advisors as slightly more important than this to their business, but otherwise agreed with the market analysis:

what have you Found to be the most important distribution channels in singapore? choose all that apply

Private banks/wealth managers

Pension funds Financial advisors Insurance Retail banks0

20

40

60

80

100

62.5%

12.5%

37.5%

25.0%

62.5%

The registration process, within a wrapper or standalone, follows three steps:

■■ Recognise the fund

■■ Register the Singapore prospectus

■■ Comply with advertising restrictions.

Singapore, in a Dublin-like bid to create local jobs, requires that the asset manager have local portfolio managers in Singapore to manage at least SD 500 million. These need not be Singaporean assets nor must they be for Singaporean clients.

Our participants highlighted ‘local registration processes’ as the main challenge faced in Singapore.

28



what challenges have you encountered in singapore? choose any that apply

Timezones

Legislationand

regulation


localapproval



fundprospectus

requirments

Accessand

contacts

Other(please

elaborate?)

0

20

40

60

80

100

12.5%

37.5%

12.5% 12.5%

37.5%

12.5% 12.5%

50.0%

12.5%

29


South Korea

About the market

South Korea is becoming a financial sector to capitalise on its economic success in manufacturing and other industries. Free trade agreements are being established with Europe and the US, and many expect the regulatory processes to improve. However, doing business in Korea has some particular challenges still. The currency is not yet fully convertible. There has been significant union unrest, and in an election year in 2012 this could be off-putting. Most distressing for foreign asset managers seeking to distribute Ucits here are the frequent changes and often discriminatory bent in the regulatory and tax framework, including preferential tax treatment for onshore versus offshore funds.

Despite the attractions of the market, the respondents in our survey reflected this uncertain environment, with only 31% currently or soon planning to distribute in South Korea.


Language, culture, mistrust of foreign funds, time zones, and the legislation and regulation issues were also noted as other barriers, or challenges to those who made the attempt, as shown in the chart below.

how long have you been distributing ucits in south korea?

Key:This is our first yearOne to three yearsFive to ten years

25.0%

25.0%

50.0%

why is south korea not oF interest to you? choose any oF the Following Factors, and Feel Free to add your own reasons

Mistrustof foreign

funds

Legislationand

regulation

Licenses Timeand/orcost toregisterand gain

localapproval


Accessand

contacts

Administratorsand serviceproviders

Culturaldifferences

andclient-service

requirements

Other(please

elaborate?)

0

20

40

60

80

100

11.1%

33.3%

11.1% 11.1%

22.2% 22.2%

44.4%

11.1%

33.3%

30




The Korea Financial Investment Association (KOFIA) provides helpful market statistics. There are 60 fund managers offering 3,390 different funds, for a total net asset value of €125,369 million. Note the small average size of the funds. Of these, 571 are ‘foreign investment funds’ with a net asset value of €21,290 million; ‘mixed’ funds, with both foreign and domestic investors, number 508 for a NAV of €7,574 million. Several sources (including Luxembourg for Finance and Citi Transaction Services) note that most of these foreign funds are Ucits, primarily Luxembourg based.

Distribution is primarily by brokerage ‘Securities Firms’ and banks (retail and private), with some sales through insurance. Platforms are beginning to develop as a channel. Distribution can only be performed by a local registered entity, and not by the foreign management company.

Regulatory approval requires a minimum of three to four months, often longer.

Our participants noted that South Korea has become interesting for the business opportunities in this growing market.

� ‘Growing market’

� ‘Business opportunities’

� ‘Significant market potential and presence’

31

Taiwan

About the market

Taiwan claims 598 onshore funds for a net asset value of €47,040 million, and 1,023 offshore funds in which domestic investors hold €59,466 million. Of these offshore funds, 90% are denominated in USD, 7% in EUR, 1% in JPY. There are 38 master agents and 75 offshore fund institutions recognised by SITCA, the Securities Investment Trust and Consulting Association.

Of our research participants, 54% distribute Ucits here, or are planning to do so soon.


Distribution is almost exclusively through banks, however our participants noted some participation from other entities such as insurance – although these may be tied or connected to banks.

how long have you been distributing ucits in taiwan?

Key:One to three yearsThree to five yearsFive to ten yearsOver ten years

25.0%

12.5%

50.0%

12.5%

taiwan: has your experience met your expectations?


50%

25%

13%

13%

32




Taiwan does not permit derivatives or umbrella structures. A local master agent must be appointed, who then appoints sales agents; no distribution directly by foreigners is allowed. For approval, SITCA must first vet the fund, and then based on its recommendation the Financial Supervisory Commission performs regulatory approval. Funds must be of a minimum size and in existence at least one year prior to application. There are limits on the amount invested in the People’s Republic of China, and the fund cannot be denominated in Taiwan dollars (TWD) or Chinese renminbi. A number of asset types are proscribed as well as derivatives including gold, futures, and real estate. The process of approval takes at least 3 to 4 months and very often much longer.

what have you Found to be the most important distribution channels in taiwan? choose all that apply

Direct to investor Privatebanks/wealth

managers

Pension funds Financialadvisors

Insurance Retailbanks

0

20

40

60

80

100

25.0% 25.0%

75.0%

87.5%

25.0%

37.5%

what challenges have you encountered in taiwan? choose any that apply

Mistrust offoreign funds

Time zones Legislationand

regulation


localapproval


All others0

20

40

60

80

100

12.5% 12.5% 12.5%

75.0%

25.0%

50.0%

62.5% 62.5%

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Not surprisingly, then, our participants cited ‘legislation and regulation’ as the biggest challenge in Taiwan, with specific ‘time and/or cost to register and gain local approval’ in third place, as shown in the chart above. The ‘all others’ category included ‘local registration processes’, ‘administrators and service providers’, and ‘cultural differences’.

Nonetheless, Taiwan remains an important market. Our participants commented:

� ‘No capital gain tax in Taiwan’

� ‘Ucits are widely recognised by SITCA’

� ‘Asset management expertise is easily located in Taiwan’

� ‘Large financial market’, ‘Size of market and growth potential’

� ‘Big allocation to offshore assets’

� ‘Business opportunities and local demand’

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The elephant in the room?Readers may be wondering why we have excluded China from our discussion and this study. Because China is closed to direct distribution, we felt the comparison across countries would be inaccurate and confusing. In China, Ucits may be obtained only by and through financial institutions who have been licensed as Qualified Domestic Institutional Investors, the QDII scheme. Some QDIIs would also obtain a Qualified Foreign Institutional Investor license to enable them to invest directly through Hong Kong. Individuals are barred from either license; only qualified institutions can invest directly in funds. Within the institutions, however, there is a growing appetite for diversification, although culturally the Chinese tend to be cautious investors, fond of tangibles like real estate.

But as noted, Chinese asset managers see Ucits as the vehicle to distribute their own product into Europe. While local clients are the core target, the point of the QDII scheme is for Chinese Asset Managers to form partnerships, such as with Western firms seeking to invest in China, in order to gain new competencies, build knowledge and skills, and develop the indigenous asset management industry, which can also expand globally. Chinese asset managers are also forming a major presence in Hong Kong.

Chinese asset managers are still learning, however. Seeding, business plans, strategy, market knowledge fund structures, regulatory regimes, distribution processes, and marketing – all are areas where Chinese firms may struggle.

‘They need help in their distribution strategy as their expertise is well below those western asset managers that entered the Asian markets years ago. They are in need of know-how in the marketing strategy from a funds perspective.’

Lawrence Au, Head of Asia Pacific Region, BNP Paribas Securities Services

In the following section, we look at the story of Ucits in this region.

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The gold standard?

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The promise of goldUcits have received privileged access to international markets including Asia. Theoretically, the time and complexity of the approval process should be reduced for a Ucits fund.

One clear lesson of our investigations however is that even Ucits cannot provide a single answer for all of these countries, and a true passportable fund in the region is not yet available – nor should we expect that one will develop quickly.

The development of Ucits for cross-border use inside Europe has been a long and unfinished business. Fragmentation remains with Europe, with different market practices and requirements even under the single market umbrella with well coordinated regulatory regimes. In the far less connected countries of Asia, we could hardly expect a smoother experience.

Why privileged access for Ucits?

All that glitters is not gold

Localisation

The myth of homogeneity is very attractive, because it would be so convenient if it were true. We imagine the economies of scale and efficiencies to be gained if we could simplify fund offerings just as Henry Ford did with the Model T: any colour you want, as long as it’s black.

■■ Comfort for regulators in reliance on ‘seal of approval’ (perhaps relatively young market, or high volume demand for approvals)

■■ Creditable European jurisdiction■■ May be able to shortcut review process

That is not possible within Europe, and it certainly is not across the Asian countries we surveyed. While Ucits is an outstanding success, and greatly simplifies the process of cross-border distribution in and outside of the European Union, customisation to meet expectations and the local requirements of each country is still a necessity.

■■ Freely marketed across the entire European Union, notification only■■ Cross border asset management (management company passport)■■ Cross border asset pooling (master-feeder)■■ Cross border mergers

The European ideal

The gold standard?

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■■ Taxation■■ Accounting■■ Regulatory regimes■■ Market practices

■■ Language■■ Distribution preferences■■ Cultural expectations■■ More funds, not fewer

The European Reality: differences in…

Ucits is a passport, but it is not multiple citizenship.

An Italian does not typically purchase investments in the same way as the average German or Spaniard. Cross-border initiatives tend to approach the countries of Europe in groups, such as German speakers or the Iberian peninsula, where similarities of culture and market practice, and possibly language, provide some commonality. The master-feeder structures of Ucits IV may even encourage creation of still more funds, bespoke for more localities.

Fragmentation:

■■ Undermines economies of scale

■■ Promotes inefficiency

■■ Causes smaller average fund size

■■ Incurs higher overhead costs

■■ Results in proportionally higher fees for investors

The advantages of homogenous marketing: US average fund size is 6 x European average

These concerns are magnified when we take Ucits to Asia, where the regulatory, tax, and accounting regimes may be very different, and there is little incentive to align. Without a single market or a coordinating entity such as the EU, each country stands on its own. Ucits are a familiar structure for Asian regulators and thus often get preferred access, which helps, but the localisation hurdles can be high. Ucits provides a passport, but making it relevant and appropriate to each Asian jurisdiction, to be truly at home there and successful, requires flexibility and patience.

Cultural preferences, market practices, and local requirements and expectations can necessitate fund engineering to accommodate:

■■ Language

■■ Distribution methods

■■ Commission structures

■■ Dispute resolution and legal recourse

■■ Fees

■■ Reporting requirements for disclosure, monitoring, compliance

■■ Local presence requirements – which may be significant

■■ Frequency of changes to tax and regulatory policy

■■ Burden of compliance – sometimes legal filings of 50 to 300 pages per fund/subfund, translated, with fees.

Remember, too, that any customisation of the fund itself which an Asian country regulator may insist upon will then also have to be re-approved by the regulator of the Ucits fund’s home domicile in Europe, and also with every other jurisdiction in which the fund is distributed.

In addition, some regimes have applied discriminatory tax treatment to give preference to onshore (domestic) funds. This can take the form of exempting onshore funds from certain taxation, applying different rates, requiring different treatment of gains, and even imposing offshore transaction taxes.

In our research, ‘legislation and regulation’ were listed by participants as challenges they have faced, or even reasons they have avoided expanding distribution, for every one of the jurisdictions studied. It is often considered easier to create a local product from scratch, possibly partnering with a local asset manager. Our respondents reflected this, with several noting that they did not distribute Ucits but instead used local funds.

Alternatives: ‘Newcits’

The European Fund and Asset Management Association (EFAMA) may not like the term, but the moniker ‘Newcits’ has stuck to describe Ucits using alternative strategies and instruments to ‘manage the risk/return trade-off’. EFAMA insists in its May 2011 report that such funds are Ucits like any other: “They operate under the one and the same regulatory framework as any other type of Ucits does. They are subject to and are managed in compliance with the Ucits framework. As such they offer the same level of investor protection as other Ucits.”

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Discriminationagainstforeignfunds

Regulationcaution

‘Newcits’

The gold standard?

Asian regulators do not see it that way.

‘After the global financial crisis, especially because of Lehman mini-bonds, the market environment in Asia has become more politicised and the regulatory approach has generally tightened. Some quarters have expressed concerns regarding whether Ucits can do too much and whether it will become a back door for hedge funds.’Sally Wong, chief executive, Hong Kong Investment Fund Association (HKIFA), Financial Times 16 January 2011

To be fair, there has been some concern even in Europe about the appropriateness of some ‘Newcits’ for retail investors, but while in Europe this is generally perceived as a manageable risk, Asians are less comfortable.

Hong Kong, for instance, feels it had its fingers burned. The Securities and Futures Commission had until recently regulated the wrapper rather than looking too closely at the underlying investment strategy, possibly relying too much on the reputation of the Ucits for safety. Following some unexpected performance results in ‘Newcits’ products, the Ucits brand now has to be ‘more closely scrutinised’ according to the HKIFA. This has at worst reduced Hong Kong’s appetite for Ucits, and at best slowed down approval of new products. Delays of one to two years in the FSC approval process are not unknown today, and the regulator imposes investor characterisation requirements to add what is perceived to be necessary consumer protections.

In Hong Kong and other jurisdictions, regulators are considering MiFlD-like consumer protection, customer characterisation, and enhanced disclosure regimes. There are also emerging RDR-style remuneration guidelines under discussion, which would, as in the UK’s Retail Distribution Review, look to improve transparency, alignment of interests, and investor protection in advice to consumers of investment products.

Structures

In a region where umbrella funds are viewed with suspicion – they are not allowed in Japan or Taiwan, and even where permitted each subfund generally must be approved separately – it is perhaps not surprising that master-feeder arrangements and the concept of a management company passport are not viewed positively. Asset managers may find the elusive economies of scale even harder to obtain as a result. Most jurisdictions where master-feeders or umbrellas are allowed will expedite the process for subsequent subfunds after the first is authorised, but the expense and paperwork remains a burden.

Summary

In the next section we explore alternatives to Ucits for distribution in this region.

■■ Ucits get privileged access, but all that glitters is not gold■■ Localisation is necessary in Europe, even more so in fragmented

markets of Asia■■ ‘Newcits’ and alternatives have led to caution in Asian regulators■■ Regulators dislike or bar umbrella and master-feeder arrangements

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RegulationCaution

Master-FeederUmbrellas

MiFlDand RDRcoming?

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Local fundsThe challenges to using Ucits in Asia have led many asset managers to conclude that it may be easier, at least in some jurisdictions, to simply set up local onshore funds instead. This is especially true in Japan. Participants in our study reflected this view, with several noting that the reason they weren’t distributing Ucits in one or more of these countries is that they have local funds, with local managers, instead.

We are beginning to see domestic funds in Asia that look like Ucits.

Charles Beazley, The Tokyo-based head of international and institutional business for Nikko Asset Management, supports this strategy, as he explained in Ignites Asia magazine in March 2012: “Ninety-five per cent of the assets across the 48 countries in Asia are local – they’re not cross-border assets; and 95% of the assets in Asia are retail, and not institutional. So you can’t just sit in one country to adopt a cross-border funds model and achieve any kind of impact, scale or profitability.”

The local approach has risks, too:

‘There is still a very strong bias to funds investing into local markets. The result is that there is a resulting bias towards local managers.’Participant comment

Many firms enter into joint ventures with local asset managers rather than attempting to create a local branch independently. Partnering with a local expert provides guidance and instant knowledge of market practices and cultural preferences, enabling a product to be tailored to fit the local market rather than shoehorning a Ucits into the right shapes as best one can.

■■ Not a shortcut in time or money■■ Firm must be committed to become fully global in operations and

distribution■■ Choosing the right partners is critical■■ Abandons any hope of cross-border efficiencies and economies of scale■■ Revenues must be shared, sometimes on local partner’s terms


Non-Ucits International FundsAnother alternative to Ucits could be other international regimes, particularly from the Cayman Islands or Channel Islands. The expense of establishing Ucits products puts them at a disadvantage, compared to rapidly established, cheaper and popular Cayman vehicles. These are currently the biggest challenge to Ucits in Hong Kong and Singapore. HSBC, for example, has made use of Cayman fund structures.

ETFsAnother popular alternative is exchange traded funds. We have seen successful cross-border distribution of ETFs listed on both Asian and US markets.

Following the endorsement by ASEAN+3 (including China, Japan, and South Korea) of the Asian Bond Markets Initiative in 2003, nine pan-Asian bond funds were created as domestic bond index tracking ETFs, for domestic distribution. The ABF Pan Asia Index Fund (PAIF) has introduced a cross-border approach, as the second phase of the Asian bond market development programme of EMEAP (Executives’ Meeting of East-Asia and Pacific Central Banks, including Australia and New Zealand as well as the active ASEAN+3 countries).

Other ETFs originally listed outside Asia, such as on the NYSE or in Europe, are finding receptive markets for cross-listing in Asia.

BUT: ETFs are a different business. This may not be an answer for traditional fund managers.

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■■ Domiciled in Singapore■■ Listed in Hong Kong and Japan■■ Primarily invests in local currency government/quasi-government

bonds in China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand

ABF Pan-Asian Bond Index Fund (PAIF)

■■ Justifiably or not, perception of lax regulation■■ May face greater scrutiny, require more adjustments for approval■■ Probably not faster or less expensive

But… a whiff of suspicion?

■■ Domiciled in US, originally listed in NY■■ Also listed in Singapore, Hong Kong, Tokyo■■ ‘largest physically backed gold exchange traded fund (ETF) in the world’

SPDR® Gold Shares (GLD)

While there are arguments in favour of local product, Cayman (or other) domiciled funds, or ETFs, none of these alternatives is wholly convincing. Local funds carry their own risks, and cannot offer the economies of scale (and resulting lower costs for investors) that Ucits hopes to achieve. Cayman or other domiciled funds carry fewer advantages, and possible risks, than might be assumed. ETFs would require traditional fund managers to significantly re-tool their business models.

There has also been discussion of an Asian passport to compete with Ucits. We will discuss this in the Prospects section, because it is unlikely to come to fruition any time soon.

In the end, despite some challenges, Ucits offers the best option for Asian cross-border expansion.

Summary

Global distribution in general has challenges, which we look at next.

■■ Local onshore funds have their own risks■■ Non-Ucits international funds will face greater scrutiny■■ ETFs are not the same as traditional fund business■■ Asian passport is in the future, if ever■■ Ucits remain the best option for Asian cross-border expansion

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Challenges of globaldistribution

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CultureExtending the distribution of a firm’s funds is not a decision to be taken lightly. Of course the business case must be satisfactory, but there are cultural issues to be considered – not only in terms of adapting to the culture of the new jurisdictions, but also in the impact on the culture of the firm itself.

We have touched on cultural dimensions of fund distribution. While every investor is unique, the influence of the predominant culture means that nations and regions tend to be characterised by certain attitudes and behaviours surrounding investing, no less than attitudes and behaviours about other aspects of life. Perceptions of risk and expectations of reward tend to vary considerably. Who is considered trustworthy as an advisor and distributor differs across cultures, and people will want different kinds of customer service. Over time, these historical preferences lead to ingrained habits of money management, and the patterns and market practices that newcomers must navigate.

Spectrums of business cultures

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Direct Indirect

Relationships Tasks

Polychronic Monochronic

Reserved Expressive

Generalists Specialists

Humour Gravity

Authoritarian Egalitarian

Rational strategy Intuitive strategy

Competition Co-operation

Conflict tolerant Conflict averse

Optimism Fatalism/pessimism

Avoid uncertainty Tolerate uncertainty

Adapted from Earley and Erez (1997) The Transplanted Executive, Gesteland RR (1995) Cross-Cultural Business Behaviour, Barsoux J-L and Lawrence P (1990) The Challenge of British Management


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It is important to understand the local business culture in general, and develop intercultural competencies in the firm. The chart on the previous page shows spectrums along which cultures – whether national or organisational – tend to differ. It is a good idea to explore thoroughly where the country you are entering fits on each spectrum compared to your own cultural orientation. Managing cross cultural relationships, particularly in the sensitive context of establishing a new business, requires conscious effort, patience, and a sense of humour. Understanding these dimensions can help.

Local presence required

■■ Local agent■■ Legal counsel■■ Distributors

■■ Sales agents■■ Public relations■■ Others

■■ Develop intercultural competence■■ Understand the local business culture■■ Consider the impact of cultural difference in relationships■■ Be ready for changes in your company

■■ Local trading and registry conventions (may be largely paper/fax driven)■■ Time zones■■ Bespoke systems at each site■■ Service level agreements (with local variations and definitions)■■ Data quality (often from multiple sources)■■ Significant translation effort to produce reliable Ucits compliance/

management reporting

Operational strategy

Operational Issues to be addressed:

Asset managers generally address these operational concerns in one of three ways: acquire, partner, or build.

One fast way to acquire a local manufacturing and distribution network, ready to run, is to buy it. This is the approach followed by Blackrock, who have acquired BGI’s Asian operations.

Becoming a global firm, or even extending your firm’s reach into a larger geography, presents challenges as well. The firm will need to establish and/or review an overarching framework for global risk management, legal compliance, and product development. The firm’s own culture and identity can change. New opportunities and potential risks arise in areas like talent retention, development, and management.

Partnering is a strategy requiring in depth knowledge of the local market. In some cases the newcomer’s equity in the joint venture will be capped, or the partner will demand higher compensation than expected, either of which has limited appeal. Choosing the right partner is tricky, and managing the relationship is critical. In some cases, it may be advantageous to partner even more comprehensively by offering the Ucits through a local asset manager’s wrapper instead of distributing directly – although again, there are financial disincentives to such an approach.

Larger firms such as Fidelity may choose to simply build their own capabilities in each jurisdiction. Where a firm intends to conduct sales on a large scale in the regional centre, building your own infrastructure lets you tailor it to exactly your requirements. Large product volumes will be essential if there is any hope of return on the investment.

■■ There are significant operational issues to address■■ Three strategies: Acquire, Partner, Build

Operating modelsThe target operating model will involve effective use of the Ucits IV toolkit to create a distribution model that is effective for the local country by either:

■■ Using a local Asian agent to distribute the product, which is the most common solution where allowed, and is often required; or

■■ Creating onshore and offshore master-feeder structures and wrappers in line with Ucits IV, a strategy particularly relevant to Malaysia.

The availability of Ucits provisions on mergers, derivatives use, diversification and leverage will depend upon the preferences of the local regulator, and any constraints imposed in the approval processes.

Asian trust companies have been established in most jurisdictions to undertake as little or as much of the distribution process as required. This allows pan-Asian distributors to connect to European and offshore target Transfer Agents in a 24 hour operating model. Transfer agency is an emerging service offering as Asians seek cost effective ways to distribute offshore products.

International service providers like BNP Paribas can offer a significant advantage to clients by sharing tried and tested operating models, designed and ready for use in each market. Where an asset manager has an existing relationship with a service provider in its home markets for its Ucits, it makes sense to leverage that relationship and make use of the service provider’s expertise.

Some specific aspects of the target service models which should be validated include:

■■ The ability to produce NAVs in the local Asian centre for occasional T+0 NAV requirements. Some service providers are using T+3 valuation models – but T+2 is the target for European/Asian Ucits products and Asians prefer immediate responses from local service centres.

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■■ A ‘multi layer fund accounting system’ with the ability to calculate fund accounting and tax at the various layers of investor, legal entity, subfund and security. This flexible model will be increasingly important for European transfer agents and administration service providers needing to get into new Asian markets rapidly (and to keep abreast of fluctuating tax and fiscal regulations such as seen in Korea).

■■ Account opening and maintenance capability to correspond with emerging local Asian and European regulatory requirements and Know Your Customer guidelines.

■■ Prompt order reception and transmission to the target Transfer Agent. This may require local manual effort.

■■ Call centres with an appropriate balance of European and local Asian expertise and cultural approach, including language capabilities.

■■ On-line and ad-hoc reporting solutions – preferably on a shared European/Asian system.

■■ Modular service options for added value distribution services such as trailer fee calculation, management of distribution networks and in some cases negotiation of fees.

Summary

■■ Use a local distribution agent for your own funds, and/or create wrappers or master-feeder

■■ Leverage service provider expertise■■ Operating model requirements:

■■ NAV■■ Multi layer fund accounting■■ Account opening and maintenance■■ Order reception and transmission■■ Call centres■■ Reporting■■ Modular services

■■ Extending distribution into a new country requires understanding of local business culture and the new country’s investment culture

■■ Operational challenges are usually addressed by a strategy of either acquire, partner, or build

■■ Operating model design will either use a local Asian distributing agent, or create master-feeder or wrapper structures

■■ Certain specific aspects of the operating model need careful consideration

Finally, what are the prospects for the future?

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Prospects

53

ProspectsThe Ucits gold rush in Asia will continue. As we look forward, there are five areas where we expect to see developments that will impact the prospects of Ucits distribution in the six countries studied.

Prospects for the future

Economic outlook

Fundamentals

While the excellent growth of recent years may be slowing in the region, economic prospects here are still widely considered better than in most areas of the world. The low market penetration and high rates of savings in most of these countries make this a very attractive marketing proposition for fund managers. Even Malaysia, which is battling high levels of household debt, has exhibited great interest in investment funds. Fund flows have remained generally resilient here throughout the global financial crises, even in the face of Japan’s earthquake.

Investors in these markets, like investors anywhere, have tended to prefer funds investing in local assets. On the other hand, savvy consumers are also interested in the diversification of their portfolios that global exposure offers. The marketing proposition of Ucits fund providers is likely to be positively received.

In an interconnected world, Asia is not completely immune to shocks from elsewhere. If the Eurozone dramas continue, or economic growth stagnates further in the West, it will have some effect on these markets, particularly where they are exporters of goods to Western consumers. So far the impact of recent turmoil has been relatively muted, felt most intensely among our six countries in Japan, the largest economy of the group by far.

Demographics in these countries are also shifting. Japan is already an aging country, and a growing middle class throughout the region is seeing extended lifespans. Governments are keen to encourage investment and preparation for old age among the population, where traditional pension coverage tends to be lower than in the West.

European Financial Transactions Tax?

A further potential impact on this region from abroad could occur if the European Union succeeds in imposing a financial transactions tax (FTT, or Tobin Tax). Predictions of the impact are mixed. The proposed tax would impact transactions between financial institutions (and not other businesses, or end consumers).

■■ Economic outlook■■ Regulation■■ Developments with Ucits

■■ Asian Passport?■■ Ucits from Asia by Asians

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The principal concern within the European fund management world is that such taxes would drive up total expense ratios (TER) and erode performance, possibly to the extent of making some funds no longer viable. EFAMA expects that money market funds would disappear entirely in Europe, and, since returns would diminish, ordinary consumers would shift assets out of funds in general towards life insurance and other products, weakening the entire fund industry. As a result, many expect that fund management companies would leave Europe rather than suffer the tax. For those who advocate an FTT, the ideal is a global enactment, but as many countries have already rejected the idea, including the United States, that is unlikely. If the tax burden is great enough to spur an exodus, one scenario sees many fund managers now operating in Europe emigrating to Asian centres. As Ucits by definition are domiciled in Europe, an EU FTT could spell the end of its long and successful reign.

On the other hand, if the tax revenue helps stabilise European economies, and if as proponents argue it helps curb economically damaging risky trading behaviours, the impact on Europe could be positive. Some economists argue that the threat of corporate migration is generally exaggerated; it is rarely that easy, even in the modern world, to uproot and relocate an entire firm. With the level of sophistication of infrastructure, systems, and networks in Europe, as well as the large pool of experienced talent, it would be difficult to avoid all trading on the continent entirely.

That need to trade in Europe could impact the Asian industry even without any migration, potentially increasing costs for non-Europeans, or forcing Asian managers to develop other options, perhaps within the region, or with Australia and the United States.

It is far from certain that such a tax will be agreed, particularly as acceptance requires consensus. The United Kingdom and others are vehemently opposed, so this may all be a moot point.

Regulation trendsWe expect that the recent tightening of regulatory scrutiny in these countries will continue indefinitely. It is, for one thing, representative of a growing international consensus about investor protection and appropriate compliance monitoring. We are beginning to see these countries contemplate controls similar to those imposed by the European Markets in Financial Instruments Directive (MiFID), and the United Kingdom’s Retail Distribution Review (RDR). Both of these initiatives sought to improve investor protection and ensure a level playing field for competition, with transparency, appropriateness, and disclosures. Asian regulators and governments have the same objectives, and see promoting trust and safety as a necessity to increasing investment amongst the population and helping local asset management industries grow and prosper.

n Good growth prospects for the region and for the funds business here

n Investors like local asset funds, but seeking global exposure to diversify

n Relatively mild impact so far from global economic turmoil, but the area is not immune

n A European Financial Transaction Tax could benefit the area, or create costs, or both; the outcome is unclear, but it is not likely to be implemented

Prospects

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While other jurisdictions have greater comfort with at least some alternative investments and strategies, Asia will probably remain cautious. Whether this is primarily a cultural manifestation or something that may relax once time, market maturity, and longer evidence in their own or other marketplaces provides greater comfort, is unclear.

Regulatory scrutiny and rigor will not decrease, but efficiency may. It is hoped that the excessive delays, and more importantly the uncertainty about average approval cycle times, will improve. This may not be the case where delay is an implicit (or explicit) tactic to discriminate against foreign asset managers.

Developments in Ucits Itself

‘Newcits’

The innovations of Ucits III and IV have greatly expanded the usefulness of the Ucits structure for Europeans, and we have seen the expansion of the brand as a result, within Europe and beyond. However, the improvements desired in Europe may be problematic in some Asian countries. Regulators in Asia are more cautious, and sceptical of alternative investments and strategies. Ucits in Asia may not have permission to utilise the full range of Ucits features for investment decisions and for structures.

Some of this suspicion is affecting Europe as well, of course. Although it is possible that Ucits V could reconsider instruments, it seems more likely that controls could be implemented at a lower level of regulation than the directive itself. Certain ‘Newcits’ could be re-categorised into the complex instrument category under MiFID rules, for instance.

Ucits V

There are other changes afoot with Ucits V, however, although this directive is not expected until at least 2014. The primary focus is in two areas:

■■ Strengthening depositary requirements, with higher oversight responsibilities, liability, and burden of proof in the case of negligence or intentional failure

■■ Remuneration of staff capable of impacting the risk profile of the fund, such that their incentives are aligned with those of investors, and imposing rules for governance.

n Rigorous regulatory scrutiny is here to stay

n Provisions for investor protection and fair competition like MiFID and RDR increasing

n Discomfort with alternatives likely for some time

n Asset managers hope delays will improve and approval cycles become more predictable

The second goal is less controversial, but EFAMA and others have expressed concerns about the depositary requirements. Contrary to the clear intent, these measures could create increased risk. With such a high burden of responsibility and liability, only the giants would be able to play, which would concentrate this function into a very small population of firms.

EFAMA has suggested other areas in which it hopes the European Commission will address what it perceives as problems with the current regime, including:

■■ Tax neutrality of cross-border mergers, and enabling mergers between different kinds of funds

■■ Amending the 10% rule limiting cross-holdings between funds, which previous Ucits directives explicitly attempted to encourage

■■ Relaxing requirements for notification of mergers to only the level required for all other notifications

■■ Relaxing requirements where the only unitholders in a fund will be professional investors

■■ Co-ordinating approaches to disclosure with the Distance Marketing Directive (e.g., right to cancel, complaints, etc.)

Improvements to facilitate master-feeder arrangements would have a direct impact on distribution of Ucits in Asia, as these arrangements are likely to be popular and cost-effective for managers seeking to establish feeder funds in multiple jurisdictions. The consequences for Asia of any of the other potential changes that could be part of Ucits V appear currently either insignificant, or at best unclear.

An Asian passport?In June 2009 the ASEAN nations created what could become an Asian equivalent to the Ucits concept. Called the ASEAN Standards, the association members (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam) established common disclosure requirements, with limited additional requirements called Plus Standards to be set by each local jurisdiction for its needs. APEC has also supported a pilot of an Asia Region Funds Passport (ARFP).

Why?■■ Partly defensive – response to past scandals

■■ Desire to be competitive

■■ Framework invented locally

■■ Desire for Asian champions rather than imported Western companies with Western funds

■■ Help develop local asset management industries, retaining revenues and talent

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Prospects

With such a high proportion of Asian offshore products originating in Europe, there are obvious incentives to creating something local.

Those who advocate a local rather than cross-border approach have argued that an Asian passport is unnecessary, and of far greater interest to the Western companies seeking to bring something with which they are familiar and simply sell more of it in these new locations, rather than adapting to each country’s traditions and culture. ASEAN chose to act, however, beginning a process that could become a passport, not for the benefit of Westerners but in the interest of firms in its member countries. Certainly an Asian passport could be more necessary for those without easy access to the Ucits framework, and thus more useful for local firms themselves.

Hong Kong, while not an ASEAN member, is a staunch supporter of an Asian passport, at least in part due to its ongoing competition with Singapore. The first true home-grown Asian cross-border funds may well be a ‘Greater China’ passport, between Hong Kong and the mainland, whose asset managers are establishing a significant presence in Hong Kong already.

Indeed, it seems likely that bilateral or small group agreements are more likely to happen if a passport of any kind develops at all. One issue with the ASEAN approach is of course that several countries of interest where Ucits are being distributed, including Hong Kong, South Korea, Japan, and Taiwan, are not ASEAN members. Local regulators, within ASEAN or in general, are not coordinated, making substantive agreement difficult and probably unlikely. Daniel Enskat, presenting an Industry Expert Review at the Monaco Fund Forum International in 2011, noted, ‘Given the very fragmented and compartmentalised state of mutual fund markets in Asia, and the lack of a supranational rule-making body similar to the European Union in the region, a pan-Asia fund passport is not likely to become a reality in the foreseeable future.’

n Would not change the main challenges for European asset managers

n Too fragmented to easily agree a true passport

n Motivation is competition between centres: Hong Kong, Singapore, Australia

n ‘Greater China’, bilateral and multilateral more likely

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Ucits from Asia by AsiansEuropean fund managers are not the only ones looking to foreign shores to expand their business. The popularity of the product, for all the reasons explored here – stable, cost-effective, well regulated, protective of investors, etc. – makes it an attractive choice for Asian asset managers as well. We are seeing scenarios where Asian managers are bringing the competition to the Westerners with their own weapons.

First, Asian firms are beginning to create their own Ucits and market these funds in their own jurisdictions and elsewhere in Asia. Asians are already significant buyers of European domiciled funds. Several sources have estimated that around 7,000 funds/subfunds/share classes are registered in Asia using the Ucits structure, representing over €380 billion. Obviously local asset managers would like to have a piece of this business for themselves.

Ucits also provides a passport to other jurisdictions in the Asian neighbourhood for Asian asset managers just as it can for Europeans. When an Asian asset manager wishes to extend distribution more widely in the region, Ucits are becoming the vehicle of choice, for the same reasons that have driven its success as a cross-border vehicle in Europe and elsewhere. Luxembourg and Dublin, homes to so many Ucits funds, have begun to actively court Asian asset managers as customers.

Competition between asset managers domiciled in the neighbourhood will undoubtedly intensify. Competition between centres already exists, famously between Hong Kong and Singapore. Japan, with a sophisticated and mature asset management industry, is in an excellent position to export and is doing so. Chinese managers are increasingly active.

And we cannot ignore Australia, also home to a sophisticated and mature industry, who considers this area its own back yard. Australia has been active in promoting an Asian fund passport, commissioning research into attitudes across the region, and offering a formal proposal to set up such a regional scheme.

Then, once you can compete across Asia, why not bring the battle right back to the invader’s camp, and distribute in Europe as well? Right now, the Asian presence in the European marketplace for funds is fairly small. Nomura is the only Asian firm listed in the top 25 international asset managers operating in Europe in Lipper’s February 2012 European Fund Market Review. This is likely to change.

Leading the charge may well be the Chinese. Although Ucits cannot be directly distributed in China, Chinese asset managers see Ucits as a vehicle to distribute their own products into Europe in a strategic global expansion. According to Asian Investor, ‘China Asset Management Company, ICBC, Bank of China, Harvest Global Investors, Bosera and CSOP Asset Management are among those that have already launched Chinese Ucits funds, to name just a few. Hong Kong subsidiary CSOP, for example, launched a Luxembourg-registered Ucits IV fund series – the China Southern Dragon Dynamic series – to meet overseas demand for renminbi and China-themed exposure. This it achieved through subfunds focused on China equity and CNH corporate bonds.’

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Prospects

n Asian firms creating own Ucits to sell at home and in Asian neighbours

n Increasing competition between Asian managers and centres, especially established markets in Hong Kong, Singapore, and Taiwan, from the power of China, and from sophisticated industries in Japan and Australia

n Asian managers marketing Ucits in Europe

Ucits are, as we have seen, an excellent vehicle to help European asset managers expand and prosper abroad. They are also the vehicle through which we can expect to see increased competition even at home.

Summary

■■ Economic outlook remains positive, with fundamentals indicating good environment for continuing funds growth

■■ Financial Transactions Tax (FTT) in Europe is unlikely, but if implemented, effect on these countries could be positive or negative

■■ Regulation will continue to be tighter and more suspicious of alternatives

■■ ‘Newcits’ may be moderated within Europe itself■■ Ucits V is unlikely to cause significant issues for Asia■■ Asian passport continues to be attractive to the region, but is unlikely to

materialise soon. Bilateral and multilateral arrangements are beginning and more likely

■■ Asians are beginning to create their own Ucits funds, to distribute domestically, in the region, and then into Europe

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61

Conclusions

62

ConclusionsUcits, as we have seen, have been very successful in Asia. There are challenges, but also significant opportunities, if firms take care to equip themselves with the right tools. The potential for Ucits distribution is still there – with global assets under management exceeding €3 trillion by 2015. The region is still booming and Ucits could very well be the solution to the lack of an Asia-Pacific cross-border product today.

ChallengesFor many, breaking into some of these markets, even with the privileged access granted to Ucits to make it easier, may not be worth the effort and expense – at least not yet.

The respondents to our survey expressed some ambivalence. As one explained,

Others expressed concerns about the fragmentation of markets in Asia. Another participant told us, ‘The process of getting our funds Ucits compliant is a long process, also the current market sentiments are not conducive to investment products as a whole.’

Our analysis confirms these concerns. Localisation of funds is essential in this fragmented market, which means that economies of scale are difficult to achieve. Local regulators will impose restrictions, including greater limitations on instruments, approaches, and structures than Ucits allows. Regulation is expected to continue to be rigorous.

Culture is a far bigger challenge than many would-be global firms fully understand. Choosing the right partners and getting access to local expertise, advice, and distribution networks is critical for success. Operational strategy must be carefully considered, determining whether to acquire a local businesses to buy a distribution network and expertise, partner, or build from scratch. Operating models, particularly servicing models, need to be carefully designed.

We have also seen that competition in this marketplace is growing. Asian and Western managers will compete globally and not just locally. Asians are keen to develop their own asset management industry, and are actively expanding domestic distribution, cross-border distribution in this area, and even Ucits distribution into Europe itself.

‘China is closed and only local product can be offered. Korea and Japan will have cultural and language issues to resolve. Other SE Asian markets are not fully open or conditional.’

Conclusions

‘Asia generally is currently the only region combining large numbers of people, growing income and levels of personal savings. Consequently it presents both attractive investment opportunities and also offers the prospect of significant cash flow.’

OpportunitiesOn the other hand, as one participant told us:

Economic fundamentals – low penetration of funds, resilient fund flows, and demographics – all create a positive environment for Ucits funds. Investors have preferred funds invested in domestic assets, but are increasingly looking for global diversification in their portfolios.

Opportunities are plentiful within our six countries, but importantly this area is a gateway to the countries in the neighbourhood – and of course especially China.

Tools for successWe have seen that success in distributing Ucits into Asia depends upon paying attention to several key areas. Our research and investigations have identified four pillars for success:

■■ Cultural understanding and adaptation

■■ Operational strategy

■■ Choosing good partners, whether to acquire, form partnerships, or work with as service providers, to gain access to expertise and entrée to local networks

■■ Designing fit-for-purpose operating and service models

The most important tool an asset manager needs is knowledge. These countries are not empty playing fields; there are some Western firms already established in each country we studied, but more importantly there is also a local asset management industry. Choose your markets carefully, and consider your competitive position. What are your unique selling points? Are you culturally compatible, or can you be? Know your markets, know yourself, and get access to trustworthy local expertise.

Prospectors for gold need good guides. This is where experienced service providers like BNP Paribas can provide the fund engineering and operational expertise to help asset managers address these challenges successfully to meet local expectations and prosper.

For the brave, then, there is surely gold to be discovered yet.

■■ Know what the market in the chosen country wants and expects■■ Know the business culture■■ Know what you have to offer■■ Know what challenges you will face■■ Know what adaptations you need to make – to your funds, and to

your firm

63

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KnadelAbout

70

Leverage our knowledge

Empower our clients so they can make informed decisions

Seek our advice

Guide clients through the challenges facing our industry

Utilise our delivery

Provide clients with a proven and cost effective delivery capability

What we doKnadel is a specialist consultancy that provides valued Knowledge, sound Advice and cost effective Delivery services to the investments industry. Our core areas of expertise are strategy, target operating model design, systems architecture design, organisational design, outsourcing, research, and change implementation.

Knadel provides consulting services to Investment Managers and is knowledgeable regarding their functions, operations, services and technology. We also have a detailed understanding of the various service provider propositions, technology platforms and services available in the market.

Our clientsWith offices in London and Jersey, Knadel provides services to support both Onshore and Offshore clients. Our clients cover the spectrum of the investment management industry:

■■ Wealth Managers

■■ Alternative Managers

■■ Hedge Funds

■■ Retail Fund Managers

■■ Distributors

■■ Software Vendors

■■ Institutional Fund Managers

■■ Service Providers

About Knadel

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Sample projects have included:

Research – market analysis, survey and interview studies | Data Solutions – design, selection and implementation | Operating Model Design – post merger integration, second generation outsourcing, new business launch, ETFs | IT Strategy | Outsource – selection, due diligence, contracts and implementation | Strategic reviews- traditional, wealth | Client service model and segmentation | Product launch and market reviews | Benchmarking – fees and services | Organisation design and advice | CRM selection and implementation | Private Equity and Property operating model and system reviews and re-design | Fund platform review

Our peopleThe quality, knowledge and style of the people are key to a successful consultancy business. Knadel prides itself in the calibre of its team – both the core advisory team and specialist delivery group. Our group of 50 consultants and associates are led by a management team who have extensive experience working with the leading investment managers, distributors, service providers and software vendors.

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[email protected]

www.knadel.com

BNP Paribas

73

About

74

The bank for a changing worldBNP Paribas is a leader in global banking and financial services and one of the world’s strongest banks. The Group was named ‘The best bank in Western Europe’ by Global Finance (2011).

Present across Europe through all its business lines, the Group has four domestic retail banking markets in France, Italy, Belgium and Luxembourg It has one of the largest international networks with operations in more than 80 countries and 205,300 employees, including 162,500 in Europe, 15,200 in North America and 12,500 in Asia (30 June 2011).

BNP Paribas holds key positions in its three core businesses:

■■ Retail banking

■■ Corporate & Investment Banking

■■ Investment solutions

BNP Paribas Securities Services is a wholly-owned subsidiary of the BNP Paribas Group. We deliver flexibility and commitment shaped to your needs, backed by the strength of a leading universal bank.

Influencing and understanding market change across our network is at the heart of delivering the expertise and solutions you need as you face the challenges of a changing world. With our local presence in Japan, Singapore, China, Hong Kong, Australia and New Zealand, alongside a strategic plan to gain presence in Malaysia and Indonesia during 2013/2015, we are committed to continuous investment in our global reach and solution breadth.

As one of the most creditworthy banks in the world as rated by Standard & Poor’s, BNP Paribas offers you the financial stability you need. We service over 7,044 funds worldwide, hold over USD 5.8 trillion in assets under custody and administer over USD 1 trillion in assets across all markets and instruments.* Present in 34 countries and over 7,700 employees worldwide, 629 in Asia region (excluding Australia), we processed over 49 million transactions.*

* All figures as of 31 December 2011

About BNP Paribas

75

A complete solution for your distribution needs

Distribution

n Distribution services

n Monitoring of distribution performance

n Management of trailer fees

Markets

n Entry points to local markets

n Local fund representation

n Local client servicing

Your funds

As asset managers, you are seeking to take advantage of the enhanced international fund-distribution environment triggered by the introduction of Ucits IV measures. Our innovative transfer agency solutions help enhance the local and cross-border distribution of your different fund ranges, particularly in Asia and Europe – enabling you to overcome the difficulties of distributing funds cross-border today.

With BNP Paribas Securities Services, you have access to a range of flexible distribution solutions that have been designed to help you distribute your funds across your various domiciles – enabling you to overcome the difficulties of distributing your funds cross-border today. We combine a global approach with local expertise to drive industry change and deliver innovative solutions – allowing you to optimise your strategy, grow and excel.

Thanks to our local presence and global capabilities, we provide unique fund representation and regional transfer agency services that support local regulatory requirements and facilitate cross-border distribution needs.

For more information, please visit:[email protected]

The information contained within this document (‘information’) is believed to be reliable but BNP Paribas Securities Services does not warrant its completeness or accuracy. Opinions and estimates contained herein constitute BNP Paribas Securities Services’ judgment and are subject to change without notice. BNP Paribas Securities Services and its subsidiaries shall not be liable for any errors, omissions or opinions contained within this document. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. For the avoidance of doubt, any information contained within this document will not form an agreement between parties. Additional information is available on request.

BNP Paribas Securities Services is incorporated in France as a Partnership Limited by Shares and is authorised and supervised by the ACP (Autorité de Contrôle Prudentiel) and the AMF (Autorité des Marchés Financiers). BNP Paribas Securities Services’ London branch is subject to limited regulation by the Financial Services Authority for the conduct of its investment business in the United Kingdom and is a member of the London Stock Exchange. BNP Paribas Trust Corporation UK Limited and Investment Fund Services Limited are wholly owned subsidiaries of BNP Paribas Securities Services, incorporated in the UK and are authorised and regulated by the Financial Services Authority. Details on the extent of our regulation by the Financial Services Authority are available from us on request.

The services described in this document, if offered in the U.S., are offered through BNP Paribas and its subsidiaries and its affiliates. Securities products are offered through BNP Paribas Securities Corp., a subsidiary of BNP Paribas, a broker-dealer registered with the Securities and Exchange Commission and a member of SIPC, the Financial Industry Regulatory Authority, New York Stock Exchange and other principal exchanges.

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