A major milestone in the cross-border fund industry was reached in July with the launch of the highly anticipated Mainland-Hong Kong Mutual Recognition of Funds (MRF). The MRF is the second Asian cross-border fund passport scheme to launch in a year, following the launch of the ASEAN Collective Investment Scheme (CIS) last August. These cross-border frameworks, along with the impending launch of the APEC Asian Region Fund Passport (ARFP), point to a major shift in the cross-border fund space. This changing dynamic could have profound implications for UCITS, which is currently the leading global cross-border fund vehicle Brown Brothers Harriman and Strategic Insight polled a group of leading asset managers to develop a picture of the current state of the UCITS framework and predict what it might look like in 2025. The results depict a dynamic, evolving UCITS framework; one that is faced with new challenges and a shifting landscape in Asia.
An eye-catching 34% of respondents believe that there is a medium or high chance that an Asian fund passport scheme will replace UCITS as the dominant cross-border structure by 2025. That one-third of respondents believe it is likely a passport will supplant UCITS is truly noteworthy. If you had asked the same question five years ago, scarcely anyone would have made such a prediction.
What do you think the odds are that by 2025 an Asian Fund Passport will replace UCITS as the dominant cross-border fund structure in Asia?
Among Asian passport schemes, half of all respondents thought that the MRF has the best chance of success, which is hardly surprising. Scheme participants have the advantage of being located in Greater China, which means it is much easier to overcome the barriers that typically inhibit cross-border fund distribution, such as local distribution rules, differing regulatory interpretations, and tax issues. Resolving these issues can take years and requires cooperation among all the participating countries.
It is important to remember that it took nearly 20 years to resolve the UCITS passport issues for distribution across Europe. Additionally, the sheer size of the potential opportunity presented by the Mainland fund market is likely another reason why respondents think the MRF has the best chance of success.
A majority of survey respondents believe that a China/EU Mutual Fund Recognition will emerge by 2025. It is easy to see why many respondents would want this to be true; the prospect of simply using an existing cross-border fund to access mainland China instead of setting up a local product is a tantalizing one. In reality, however, it is not likely to happen. China/EU Mutual Recognition would run counter to the policy goals of Mutual Recognition, which are to develop the asset management industry in mainland China and to support Hong Kong’s efforts to establish itself as a major financial services hub. China/EU Mutual Recognition would also require EU policymakers to allow the distribution of Chinese mutual funds to EU retail investors, which is unlikely.
In your view, how likely is China/EU Mutual Fund Recognition by 2025?
Overall, there appears to be a major change in the Asian cross-border fund space. Survey respondents anticipate that, in the region, there will likely be a shift away from UCITS funds toward local funds and fund passport options. Of course, none of this will happen overnight as evidenced by the majority of respondents who still do not believe that
Hong Kong will emerge as a bigger fund domicile than Luxembourg or Ireland by 2025. Respondents cited a combination of the strength of the UCITS brand as well as first-mover advantage as the main reasons for Ireland and Luxembourg’s continued success.
The rise of an Asian fund passport does not portend the end of UCITS funds, which will likely still remain a key global fund product. While Western asset managers are looking to move into the MRF, Chinese managers are starting to establish UCITS funds in Europe. By 2025, the cross-border fund space is likely to be recalibrated with an Asian passport fund joining UCITS as a key component of global asset managers’ distribution strategies.
Visit bbh.com/ucits2025 for a full report of our findings.