Asia fund passport could manage AU$600b by 2030: AT Kearney

More than AU$600 billion of assets could be managed under a multilateral framework for investment funds in Asia within 15 years, says a report by AT Kearney, but savers and fund managers might not fully benefit from trade liberalisation unless competing schemes in the region are consolidated, reports the Sydney Morning Herald.

Australia, Singapore, South Korea, the Philippines, Thailand and New Zealand have signed up to the Asia Region Funds Passport, which has been created under the auspices of APEC and is set to begin next year. It will allow investment managers from one country to sell funds to investors in another without needing to go through local licensing and registration procedures. Assistant Treasurer Josh Frydenberg was in Japan in June encouraging the world’s third-largest economy to join the passport, which Japan is considering.

This inherent fragmentation is a roadblock to the benefits available from implementing a true pan-region funds passport, according to the AT Kearney report.

The establishment of the Asia Region Funds Passport is a response to the success of the European Union’s UCITS managed funds structure, which has allowed fund managers in Europe win management fees for managing Asian savings.

APEC said in June that when the passport is operating, it could save Asian investors US$20 billion ($27.4 billion) annually in fund management fees, provide higher investment returns and create 170,000 jobs in APEC economies within five years.

However, even before the passport has got off the ground, two other regional schemes – the ASEAN Collective Investments Scheme, launched last year, and the Hong Kong-China Mutual Recognition, which came into effect July 2015 – are competing against it. Australia is not a member of either of these schemes.

“This inherent fragmentation is a roadblock to the benefits available from implementing a true pan-region funds passport,” AT Kearney said in a report that will be released at the Financial Services Council annual conference later this week, where the export of financial services to Asia will be a key theme.

Desire for Japan, China to be involved

AT Kearney, which surveyed 22 investment management companies across the region for the report, found high levels of support for a pan-Asian funds passport but also the desire for large markets such as Japan and China to be included to provide critical mass.

“An Asian funds passport must provide access to as many Asian markets as possible. This would make it more attractive to investment management companies, and would assist in obtaining the economies of scale needed to minimise costs and compete with UCITS,” the report said.

“Without a multilateral framework that facilitates the movement of managed funds across the region, the investment management industry will remain excessively complex and innovation will be stymied.”

The passport could exceed $600 billion of funds under administration by 2030, around 11 per cent of the Asian mutual funds market, AT Kearney said, assuming it captured just 2 per cent to 4 per cent of funds managed through UCITS funds. Australian managers would be hoping to win a significant share of that, which is around one-third of fund assets currently under management in Australia.

Andrew Bragg, the director of policy at the FSC, said many Asian economies had fledgling asset management industries which were not big enough to support the three different schemes. “Geopolitical considerations should be set aside and we should work to harmonise these schemes, which will not serve the region well unless there is convergence,” he said.

Reducing the variation in interest withholding tax rates and establishing a “collective investment vehicle” regime in Australia were important steps and work needed to begin on establishing mutual recognition frameworks so regional regulators can exchange tax-related information, Mr Bragg added.

Earlier this year, six other APEC members not currently signed up to the passport – China, Japan, Hong Kong, Indonesia, Malaysia and Vietnam – joined parallel discussions on the passport’s rules, APEC said in June, with Australia, Korea, New Zealand and Singapore provided training to help these countries understand its operation. APEC Finance Ministers will provide an update on the passport at a meeting on September 10 and 11 in Cebu, the Philippines.