Brexit muddies the water for Asian fund managers
How impending Brexit complicates life for Asian fund managers eyeing Europe remains unclear, in particular, the departure's effect on the distribution of Asian funds in Europe
With the March 29 deadline for Brexit fast approaching, prospects of a fragmented Europe will certainly be making life more complicated and challenging for Asian fund managers who seek to sell their products in the lucrative European market.
The ongoing political deadlock in the UK means how events unfold is far from clear. Though the UK is legally bound to exit the European Union (EU) on March 29, political machinations in the House of Commons suggest other pathways are perfectly feasible. Another referendum is still possible, as is a temporary stay of execution, whereby an extended period of time is granted before the UK eventually exits the EU. Generally considered a worst-case scenario would be a no-deal Brexit, which remains on the cards unless the British parliament can agree on the next course of action.
Britain's trading arrangements would be set by rules laid out by the World Trade Organization (WTO) were the UK to crash out of the EU without an agreement in place and ratified by the British parliament. At the moment, the British parliament seeks some sort of renegotiated deal with the EU, but whether the EU is willing to amend the existing deal in place is highly questionable.
British financial regulators and ministers may have what are known as statutory instruments (SIs) at their disposal, enabling authorities to push through changes without parliamentary backing. These changes would represent a continuance of the status quo, rather than introducing new measures, with many EU rules becoming enshrined into British law.
Assuming the UK leaves the EU, at the very least, Brexit will rule out the UK as a fund domicile for Asian fund managers, who may no longer be able to use the UCITS fund passport for distributing their funds in the UK. At present Asian UCITS funds domiciled in Dublin or Luxembourg can be sold in Europe and the UK. It remains unclear whether UCITS funds can still be sold in the UK after Brexit, a key issue to resolve that impacts distribution of Asian funds in the UK and the rest of Europe.
"What we're hearing and seeing from a number of Asian clients is that they are launching a UCITS fund, starting the distribution in Europe and assuming success. However, before Asian managers head off on this journey, they need to think about their strategy, look at how it will work in Europe, and then decide what fund structure they should use," Caroline Higgins, head of global fund services for Asia at Northern Trust says in an interview with The Asset.
From a European perspective, there's a host of opportunities within Europe, but it's also heavily competitive. A UCITS framework provides access to a passport which helps navigate EU market entry. But in reality, that passport is just a stepping stone towards distribution in a complex landscape of local market regulations and cultural nuances," Sascha Calisan, distribution product manager at Northern Trust says in the same interview.
Although the demand for Asian funds by European institutional and retail investors seeking to diversify their portfolios has been rising, Asian fund managers face a challenging task when building their distribution networks in Europe.
"While fund managers in Asia have a great deal to offer European clients, breaking into the market is not always easy. Managers must contend with a host of different complexities, including optimizing complicated distribution channels, tackling regulatory requirements, navigating cultural nuances and determining which investment vehicles would work best," according to a white paper by Northern Trust entitled "Establishing a footprint in Europe, considerations for asset managers in Asia".
Among the key takeaways of the white paper are:
* Asian managers accessing the European market must develop a sales and distribution strategy that helps distinguish them from the competition.
* Forging strong relationships with key distribution channels will be critical to managers' success.
* Fund managers who adopt a 'fly in and fly out' approach may struggle to build inroads in the market and may not understand its cultural nuances.
* Developing a targeted approach to market selection will help maximize resource & control cost.
* Key considerations are domicile location and investment vehicle structure.
In an interview with The Asset, Clive Bellows, head of global fund services for EMEA at Northern Trust cites the challenges that Asian fund managers face when planning to distribute their products in Europe. "First of all, it's hard to sell your funds in Europe unless you've got a track record. You need a three-year track record to really convince anybody that it's worth investing money into the fund," Bellows says.
"By the time you've paid to get your fund established including fund registrations in various countries, legal and audit fees, custodian depository and money that effectively contributes to the expense ratio of the fund, it would be a struggle to make success of it economically if the fund is smaller than US$100 million" Bellows says.
In order to have economies of scale, a fund must also have about US$100 million in assets under management in order to be cost-efficient.
As institutional and retail investors have diversified their portfolios, their appetite for new products has increased. To meet this demand, Asian fund management firms have increasingly cast their eyes towards Europe, and it is easy to see why. Investment funds domiciled in Europe stood at 15.6 trillion euros at the end of 2017, with the net assets of investment funds increasing by 10% during the year, and 95% since 2007, according to Northern Trust's white paper.
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31 Jan 2019