HONG KONG: Thoughts from UCITS Asia

Thursday March 19 2009

Darren Burrows, Managing Director of Funds-Axis, attended the IBC UCITS Asia event in Hong Kong last week, speaking on the current challenges for Asset Managers and leading the Derivatives & UCITS III workshop. Today, Darren shares some thoughts from the event:

Attendance

Representatives from both Ireland and Luxembourg were out in force, representing the Administration companies, industry bodies, law firms and other professionals; I believe I was the lone voice from the U.K. There was also a delegation from the European Commission.

It was very clear that there is significant effort being put in by the Luxembourg and Irish industry bodies to get Memorandums of Understanding in place with the different Asian jurisdictions in order to support fund distribution; the success of this is also clear from the huge success in development of UCITS distribution in Asia over the past 5 years.

The UCITS brand

In Europe, we hear a lot about the strength of the UCITS brand, its global recognition and its success as regards distribution in Asia and elsewhere. At the UCITS Asia event, some other themes were noticeable:

* More often than not, those selling funds in Asia generally do not know or care that they are selling UCITS and investors do not know or care that they are buying UCITS

* Where UCITS are doing well (Taiwan, Hong Kong, Singapore), UCITS are being sold and bought because of the absence of other fund types and other products to sell / buy

* The quality of funds being sold to investors in Asia was questioned. For example, Latin America, China and Asia Pacific Funds are amongst the most popular fund strategies being sold to Asian investors, not UK, European and US equity and bond funds

* Reputational issues for investment into funds and hence for UCITS could flow from the performance of these funds in current market conditions

Local Regulation

Asian Regulators are concerned about the scope for sophisticated derivatives usage and complex strategies under UCITS III and the suitability of such products for Retail investors, and are reviewing the funds objectives, strategies and risk management arrangements at a micro level

The different Asian Regulators each apply local investment limits (e.g. Taiwan, max 40% long derivatives exposure), additional to the UCITS investment limits; Product providers, Distributors and Administrators need to be cognisant of this .

The different Asian Regulators each apply different investor communication and disclosure rules; there would be great advantages for distributors if the Key Investor Document under UCITS IV is accepted across Asia .

The Korea experience, where UCITS distribution was severely damaged overnight by changed tax legislation in favour of local funds, demonstrates the need for European industry bodies and Managers to be maintaining strong relationships with local Asian Regulators.

Infrastructure

There are infrastructure short-comings as regards funds distribution in Asia.

There are few local transfer agency systems and sub-registers operated for UCITS in Asia .

These are being addressed by the Asia Fund Automation Consortium.

Product Providers could help with more thought, standardisation and communication around order cut-off times, settlement periods, dividends, commission calculating etc.

Funds-Axis are preparing a Research Paper for Managers on fund distribution in Asia Pacific. If you would be interested in this publication, please contact mailto:info@funds-axis.com.