Asian appetite for Ucits keeps on growing

There is no doubt that Asia today is one of the most important markets for the distribution of cross-border European funds or Ucits (undertaking for collective investment in transferable securities) funds.

According to a study published last year by the European Fund and Asset Management Association (Efama), 90 per cent of the net sales of international Ucits promoted by the participating companies in 2007 originated from Asia.

Another study published early this year by Efama revealed that while the global financial crisis has had a severe impact on the net sales of cross-border Ucits in Asia, the region currently accounts for approximately 17 per cent of the AUM (assets under management) value of all Ucits sales of the survey participants.

Moving in

Not surprisingly, recent years have seen Western financial institutions steadily making a beeline towards the region. In May last year, UK fund house Threadneedle launched fund operations in Asia through the opening of its Hong Kong office.

In October 2008, leading global custodian, RBC Dexia launched its regional processing centre in Malaysia while in May this year, PNC Global Investment Servicing, a provider of processing, technology and business intelligence services to asset managers, broker/dealers and financial advisors worldwide, launched fund distribution support services

in Asia for European and US mutual fund firms with Asia-based investors.

Stephen M. Wynne, chief executive officer, at PNC Global Investment Servicing, said: “There has been an increased appetite for investment products within the Asian markets. This latest enhancement provides a crucial service to fund firms that want to grow their business and extend their reach into this locale.”

“Asia is a fantastic market for cross-border funds. Not only is it important in terms of business but also in terms of growth potential, since it has shown remarkable stability in the face of the financial crisis,” states Elisabeth Meyers, director, at investment fund product management at Brussels-based Euroclear, which provides domestic and cross-border settlement and related services for bond, equity, derivatives and fund transactions in Europe.

In 2008, Euroclear opened an operational centre in Hong Kong and also started offering its investment funds processing platform, FundSettle to the Asian market.

Dean Chisholm, head of operations, Asia-Pacific at leading investment management company, Invesco, however cautions fund houses seeking to benefit from the highly attractive Asian funds market.

“No doubt the market is very profitable and European funds are well designed for cross-border distribution,” he says, “but the biggest issue that Western fund houses face is how to establish themselves in the marketplace. It is extremely difficult because local presence is required and a lot of local marketing and training support is expected by the distributors. Suitcase support from the other side of the world does not work.”

Apart from the top few firms such as JPMorgan, Merrill Lynch (now BlackRock), Fidelity, HSBC, Schroder and Invesco, which have been present in the region for several years, few of the new entrants have been able to successfully establish themselves, says Mr Chisholm. “Distributors are looking for long-term commitment to the marketplace. Several European fund houses have been able to launch one or two funds, but they are not able to launch an all-weather funds range.”

A few examples of cross-border funds that have been able to make an impact in the marketplace, points out Mr Chisholm, are India based funds that were launched by HSBC a few years back, Bric [Brazil, Russia, India and China] funds from BlackRock, and commodity funds from Schroders.

Fractured landscape

Unlike Europe, which is moving towards a single financial services arena, the landscape in Asia is highly fractured with each country having its own specific rules and regulations. The only markets in Asia open to foreign investment funds are Taiwan, Singapore and Hong Kong. Other economies, such as India and China have not been successful for cross-border funds distribution for a variety of regulatory, tax and cultural reasons.

For instance, China’s QDII (Qualified Domestic Institutional Investor) program introduced in 2006 to allow domestic institutions and residents to buy financial products overseas via mainland commercial banks and other financial institutions, has suffered due to the turmoil in the global capital markets. Some QDII products lost more than 70 per cent of their value while certain financial institutions have come under fire for failing to sufficiently disclose investment risks tied to their products.

“Apart from regulatory barriers, in both India and China, the domestic stock market is performing much better than international markets. Domestic investors therefore are favouring domestic equity funds,” states Mr Chisholm. However Invesco, he says, is much more bullish about the opportunities available in China than India. It already has a presence in China since 2003 through a joint venture.

“Not only is China displaying a better growth rate, the Chinese authorities are reconsidering approvals for new QDII products. Regulations might be easier to navigate in India, but the opportunity is greater in China,” says Mr Chisholm.

While certain other industry experts share his predictions regarding China, leading French securities services provider BNP Paribas has placed its bets on India, and is in the process of building a transfer agency processing centre in the city of Chennai in India. In addition, it has established a joint venture with local Indian firm, Sundaram Finance, to support domestic fund services.

Frédéric Pérard, head of products, global fund services at BNP Paribas, explains the firms’ strategy. “Today in Asia, one needs to offer domestic fund services as well as cross-border fund services,” he says. “Keeping the linguistic and cultural barriers in mind, we decided to go with a local partner. It will help us establish credibility. We looked at other Asian countries apart from India, but while China is very complex, Korea is very domestically oriented. The future size of the market is very important for us and India offers the best opportunity.”

A recent report by industry analyst firm Celent estimated the size of the Indian mutual fund industry at $150bn (E105bn) with a compound annual growth rate of 25 per cent between 2004 and 2009. Celent estimates that the market will grow at a higher rate of 29 per cent in the next five years.

Automation levels

“Today Asia is where Europe was 10-15 years ago,” remarks Mr Pérard. Not only does this statement hold true with regards to the absence of an initiative to create a pan-Asian financial services infrastructure, but it also applies to the state of automation in the region. Automation in the Asian mutual funds industry is abysmally low. Fax is the most common mode of communication.

“In Asia, distribution is controlled by retail banks which are driven by commission and trailer fees,” adds Simon Cleary, senior vice president, fund solutions and private account services, investor services and markets at global custodian Brown Brothers Harriman.

“Hence they are less interested in automation. Also, the benefit of automation for the distributor is considerably less than for the transfer agent or the fund company,” he adds.

In Taiwan, for example, which has among the highest levels of personal wealth in Asia after Japan, and a majority of the country’s mutual fund assets are invested in Ucits funds, there is a very low appetite for automation.

Swift [Society for Worldwide Interbank Financial Telecommunication], which has been working for the past five years to automate the funds processing space, has thus far managed to convert only five leading banks, says Mr Cleary.

A recent Efama-Swift survey covering close to 80 percent of the total Luxembourg investment fund (mostly Ucits) order volumes between January 2007 and December 2008, revealed that while nearly 30 per cent of order volumes for Luxembourg funds originated from the Asia Pacific region, only 8 per cent of the orders were based on the ISO 20022 format and around 28 per cent followed some other sort of proprietary automation formats. The rest were manual.

“While much has been achieved in cross-border funds globally, much still remains to be done in Asia,” says Lisa O’Connor, head of asset management, Asia-Pacific for Swift. “Up to 40 per cent of Ucits funds transactions from Emea and the Americas to Luxembourg are ISO standardised, while the number stands at only 8 per cent in the Asia-Pacific region.”

With the Asian market being rather price sensitive, Swift is currently working with the funds industry to offer its solution, Alliance Lite, as a lightweight way to automate lower volume transactions.

“The processing of non-automated orders is costly and risky; Swift, along with industry groups such as the Asian Funds Automation Consortium, has been trying to increase the use of ISO 20022 messaging formats but that is a slow process,” says Ms Meyer at Euroclear. She believes that getting firms to adopt the Swift format will only help resolve part of the problem, that of routing the order. The cash settlement process and providing information on funds gets left out, which she says can be fulfilled by fund processing platforms such as FundSettle.

Competing firm, Clearstream, a leading European supplier of post-trading services, has in the meanwhile launched a customized version of its Vestima+ automated order routing service. VestimaLink is a service designed to replace the fax for Asian-based fund distributor.

Lower fees

It provides distributors with a single access point to place their orders for European investment funds and these instructions are then supported throughout the trade lifecycle by the standards-based system. The fee for the service is less than E0.5 per trade, says Phillipe Seyell, director of investment funds at Clearstream.

“In Europe, since investors stay longer in funds, they do not mind paying higher fees to execute a trade. But we found that in Asia, the average holding period for a fund is only three to six months. Therefore we cannot afford to have a higher expense ratio,” he explains.

In the six months since its launch, VestimaLink has already managed to attract 20 large banks in the region which include Taiwan and Korean local banks and European private banking institutions in Singapore.

“Euroclear with its FundSettle platform and Clearstream with Vestima have had considerable success in Europe. They will certainly have a role to play in improving the operational infrastructure of the Asian funds landscape, along with custodians like us,” says Brown Brothers Harriman’s Mr Cleary.

“The priority in Asia has been streamlining the processing of domestic fund transactions. We have started to see the focus shift to include the processing of third-party, cross-border funds,” adds Euroclear’s Ms Meyer.