The Asia Region Funds Passport: solving the wrong problem

The nirvana of an Asian funds passport – that would allow Australian fund managers unfettered access to Asia’s growing middle classes and already substantial private banking client set – has been enticingly close to our grasp for some time.  It has been a meaningful policy objective of various firms and their industry representatives and the subject of many a ministerial announcement.  And in April our appetite for regional growth was encouraged once again when the Government signed the Asia Region Funds Passport’s (ARFP) Memorandum of Co-operation with Japan, Korea and New Zealand – ostensibly to create a single market for managed funds in Asia. This was followed in the recent budget with the announcement of two new collective investment scheme (CIV) structures aimed at foreign investors.

The intention is to open up Asia’s large and growing retail asset pools to Australia’s asset management industry (and vice versa).  It’s a noble undertaking.  The whole Australian wealth industry could clearly benefit.

But will Asian retail investors buy our fund structures?  We don’t think so.

It’s well known that foreign investors have found the structures of our managed investment schemes (MISs) difficult to digest.  Withholding tax hasn’t helped either.  Much easier to understand and invest in are UCITs structures.  European and global managers alike have been very successful gathering Asian assets into UCITSs funds, so much so that (for lack of an alternative) several Australian managers have established their own UCITs structures in Europe.

The proposed new CIVs go some way to addressing the competitiveness of our fund structures but in our view the structures on their own won’t be the catalyst driving Asia’s retail customers to buy our fund structures; there are other barriers that need to be overcome first.

If we consider why Australian asset managers haven’t been successful in Asia – or in the most part, haven’t even tried to enter – it’s not because they didn’t have the right investment structure.  Asia’s prominent markets can be difficult to enter but they are certainly not closed to managers from Australia.

In reality, fund managers trying to make it large in Asia are faced with a complex range of regulations and licensing requirements in each country, (generally) a lack of investment strategies that appeal, no brand, distribution-related challenges, a 7-year+ payback period and (last of all) a requirement to manufacture UCITS or local funds.  The current regulatory changes remove just one of those barriers.

So how can Australian asset managers access Asia’s growing asset pools?

It’s clearly important to understand the factors that drive success in each market well ahead of a decision to enter.  As today’s table shows, for Japan at least, establishing a brand is a must have.

The table comes from our Global Asset Management Study, a recently concluded program based on >1,000 face to face interviews with leading retail gatekeepers and advisers across the world’s major markets, including those in Asia.

In it, we contrast the factor that participants say are important (stated importance) with those that areactually important (derived importance).  As you can see, they’re often not the same thing.

Looking at selection factors in Japan as a case study, it’s clear brand is critical – both as an investment selection factor and a marketing factor.  It’s just one of many hygiene factors for success that have nothing to do with fund structures.

Successful entries by Australian managers into Asian markets are few and far between (although this is not a uniquely Australian problem).  Although the regulatory reforms are welcome, we shouldn’t expect an influx of offshore investors coming into Australian funds.  It’s more likely that the problems of low brand investment (with investment professionals and the retail marketplace), an insufficiently unique or in-demand product, and failure to address distribution-related barriers will persist.

So there is scope for Australian managers to compete in Asia and the challenges they face are (largely) within their control.  If a manager can overcome them, structure won’t get in the way.