A Chinese bank setting up a Luxembourg Ucits fund inevitably means it could compete with European and American managers' cross-border business in Asia and the world, says Nick Fitzpatrick.
After a lull in the second half of 2008 when launches of Chinese funds that are permitted to invest in foreign assets dried up, China returned to the market in January by approving another product.
The Chinese project that provides China’s institutions with access to securities and funds outside of China is the QDII, or ‘qualified domestic institutional investor’, project. Since a memorandum of understanding signed between Luxembourg and China in 2008, Chinese institutions have used QDIIs, which must be domiciled in China, to invest in Luxembourg funds offered by other managers, essentially using QDII as a fund-of-funds vehicle.
But a Chinese bank is said to be selecting a Luxembourg custodian to provide services for a Ucits product that it intends to establish under its own brand.
The bank could invest on behalf of Chinese clients in its own Ucits-compliant Sicav, a type of open-ended collective investment scheme, which will be domiciled in Luxembourg.
However, as the Sicav is Ucits compliant the bank could also distribute the fund cross-border into other countries where Ucits funds are recognised, including its neighbours in Asia. Were it to do this, the bank would be competing with European and American managers for the same cross-border Ucits business in future.
Sources close to the deal would not reveal the name of the bank, but Bank of China and Industrial and Commercial Bank are two major Chinese banks with a business in Luxembourg. Another source said it was the first deal of this kind he was aware of in Luxembourg.
Bank of China has already raised money from international and domestic investors for funds run by its Swiss-based investment management business, BOC (Suisse) Fund Management.
Luxembourg has traditionally positioned itself as a gateway to Asia for Western asset managers. With the rise of developing economies, the Grand Duchy may well be able to position itself also as a gateway for managers from emerging markets to broaden their presence in their own regions and to access European clients too.
Mirae Asset Global Investments, a fund manager founded in Korea in 1997, launched its Luxembourg-domiciled Global Discovery Fund Sicav in March 2008, mirroring its Korea-domiciled Asia Pacific funds.
In January this year Mirae registered its Luxembourg Sicav fund range focused on emerging markets and the Asia-Pacific region for UK distribution.
According to Sebastien Chaker, a vice president at Brown Brothers Harriman, which currently provides overseas custody services to Chinese banks on behalf of eight QDIIs that invest in Luxembourg products, fund management links between Luxembourg, China and broader Asia are entering a third generation.
“In the past European and American fund managers have used Luxembourg to build European and then Asian cross-border business. What is happening now is that Asian asset managers are also using Luxembourg to distribute across Asia and potentially expand into Europe.”
Were Chinese banks and insurance companies to target other Asian neighbours with their own cross-border Ucits products, Hong Kong would almost certainly be a target. The Ucits brand is highly regarded there and Luxembourg-domiciled Ucits in particular are popular. Two out of three Ucits funds distributed in Hong Kong are domiciled in Luxembourg.
“Luxembourg is extremely well received in Hong Kong, even though some say Hong Kong is a competitor. Even Chinese asset managers want to use Luxembourg vehicles to invest in China and raise money there,” says Bob Kneip, CEO of Kneip Consulting.
The Chinese memorandum of understanding and the firm follow-up action by China to translate the document into real business are a further stamp of approval for Lux’s Ucits brand.
Although the memorandum of understanding means that Chinese QDII institutions – who are typically in asset management joint ventures with Western partners – can invest in Luxembourg funds, these funds can still not be distributed directly in China.
QDII sits quite well with any desire Luxembourg may have to attract more pension fund money into Ucits. Pension funds generally offer stable, longer-term flows than the average mutual fund, and volatility of flows experienced by Ucits funds in Luxembourg and elsewhere during the market turmoil of 2008 make a pensions strategy a priority for some.
Lou Kiesch, head of regulatory consulting at Deloitte, says: “China is looking for external investment solutions to help with pensions and wealth management. One of those solutions is the QDII. The memorandum of understanding allows Luxembourg funds to penetrate into China via QDII schemes.”
China launched the QDII programme in April 2006. Another project – the Qualified Foreign Institutional Investors (QFII) scheme – offers foreign investors access to securities markets in China. Both developments are said to be creating attractive opportunities for Luxembourg.
QDII also allowed the Chinese authorities to ease pressure on domestic asset prices by offering Chinese investors access to foreign markets. At 31 December 2008, a total of 26 fund management companies had obtained licences to issue QDII products and ten were being marketed by those companies.
According to a brochure published by the Association of the Luxembourg Funds Industry, QDII products issued by fund managers show that they are investing on the Hong Kong market, in Chinese-related securities or in top performing foreign funds.
The global financial crisis cut the market share of these products significantly: at the end of 2008, assets under management amounted to RMB 51.7bn (€5.5bn), down 52% from 2007.
Faced with this, it is even more likely that Chinese and other emerging market fund managers will attempt to diversify their client base, and revenues, in other markets using Ucits. Already Luxembourg has signed a double tax treaty with India – that other booming Asian economy where a number of homegrown asset managers already exist. Other markets include Indonesia, Malaysia, South Korea and Thailand.
For Asian banks and asset managers to set up and distribute Ucits funds across international borders, it shows that Luxembourg is no longer a one-way street to Asia purely for Western asset managers.
Luxembourg will now hope that Asian institutions that employ the Ucits brand will use it sensibly and not do anything to tarnish it.
©2010 funds europe