July-August 2010

UCITS: East meets West meets East

worldmapAsian fund managers are setting up Ucits funds to sell their products back into their home markets... and compete with European managers. Angele Spiteri Paris reports The success of European and global fund managers in Asia using Ucits funds has been well documented. But now the tables are turning as more Asian players make use of these funds to penetrate both the European marketplace and compete with foreign players on their home turf. Luxembourg, a major centre for Ucits, is seeing more Asian players set up such funds, both to break into European markets and also to sell back into their domestic markets.

“Ucits is now a gateway for Asian fund promoters,” says Charles Muller, deputy director general of the Association for the Luxembourg Funds Industry (Alfi). “Many of the new arrivals to Luxembourg are from Asia. They are looking to use Ucits to break into the European marketplace and also to sell their funds back into Asia and their domestic markets,” he says.

Scott McLaren, head of Asia Pacific sales and distribution at RBC Dexia Investor Services in Luxembourg, says: “It should be conceivable that Asian managers see the virtues of an offshore vehicle to access markets outside of their home markets or compete with all the other global fund managers who are using Ucits to distribute funds in Asia.”

Earlier this year there were sounds in the market suggesting a Chinese actor was considering setting up a Luxembourg-domiciled fund. Nothing has yet been confirmed and Elliot Berman, head of sales Emea at Mirae Asset, says: “If any Chinese firm is going to set up a Luxembourg fund it is more likely to be one of the offshore Chinese entities such as Bank of China (HK) or ICBC.”

Muller, of Alfi, says: “We’re focusing on China. There is interest in China and I have still to see the first fund, but the interest is there.”

But Michael Ferguson, asset management leader at Ernst & Young Luxembourg, says: “I personally have been working with a number of local Asian asset managers who have decided to establish their international fund ranges in Luxembourg. These include asset managers from China, India and Korea. These are very significant players in their home countries with substantial assets under management and deep knowledge of the Asian markets.”

And this means the Asian players will be going head to head with the European actors, in both the domestic and foreign markets.

Ferguson says: “We hear a lot about the world moving east – but one should never forget that one of the outcomes of this move is that the big Asian players will be moving west to compete with established European and US asset managers. I see this as a key trend over the coming years and have had several enquiries from Asian asset managers about establishing asset management and investment fund operations in Europe.”

Muller, of Alfi, says: “Asian managers will expand their European footprint through Ucits. Once you have the Ucits licence you are on a completely level playing field with all the other European asset managers. There will be increased competition also for European fund managers, particularly when it comes to promoting funds investing in Asia. Asian asset managers have a vast knowledge of the region so we expect them to be quite strong when they set up a fund that invests back into that region and sell that fund to European investors.”

Supporting the claim that Asian managers are in fact using Ucits, Hong Kong-based manager Galaxy Asset Management announced the launch of a Ucits version of its Galaxy Opportunities Fund.

Having enlisted the help of Merchant Capital, a Ucits III platform provider, the Asian player will now offer investors access to the Greater China markets of mainland China, Hong Kong and Taiwan, within a Ucits wrapper.

But competing in Europe will not necessarily come easy.

Berman, of Mirae Asset, says: “Asian managers will only be able to make an impact on the European market if the products they are bringing offer something different to investors – if, for example, by virtue of having local teams of fund managers and analysts, they are able to uncover opportunities that managers from outside the region may fail to see, and thus extract more alpha from what remain relatively inefficient markets.”

Berman says that Mirae Asset remains the first and only emerging Asian fund house to have set up a fund in Luxembourg. Muller says the Mirae story, of a Korean asset manager coming to Luxembourg to sell its funds into the Hong Kong market, is one that gives a good illustration of how Asian managers can make use of the Ucits regulation and of Luxembourg.

However, setting up Ucits funds may present Asian fund promoters with certain challenges. One is the basic act of getting to grips with the legislation.

Muller says: “The regulation is quite stringent. The rules are perhaps much stricter than what they will have been used to. Very often Asian managers used Cayman Island funds or even local funds and so they have to get used to the idea of being strictly regulated. It’s a change of mindset but once these changes are implemented they can see the benefit of them.”
Another issue that Asian managers have to grapple with is the fragmentation in the European market.

Berman, at Mirae Asset, says: “Asian players wishing to sell products in Europe would have to face getting to grips with all these different regulations. Furthermore, if they wish to sell directly to private investors they will have to devote time and resources to the often long and arduous local registration process in each jurisdiction.”

He says that in addition, Asian managers will need to create brand awareness in a highly competitive environment and adapt their marketing materials to meet the needs and standards of European investors, which may differ from those in their home markets.

But Ferguson, of Ernst & Young, says: “I don’t believe these players will come up against any significant challenges in setting up funds in Luxembourg. Luxembourg has welcomed asset
managers from over 50 countries since 1988 that have decided to establish their international investment fund platforms in Luxembourg.

“The big challenge will be getting access to the right distribution channels – that is the big challenge for these new players given that in many continental European countries distribution is controlled, to a great extent, by a relatively small number of big banks and insurance companies, especially on the retail side. To gain access to this distribution, these players will have to establish their performance, related risk management processes and credibility of their products.”

Jag Alexeyev, head of global research at Strategic Insight, a research and consultancy firm, agrees that distribution will be one of the biggest challenges for Asian managers coming to Europe. He says: “Developing credibility and relationships with fund selectors will be a long process that might not yield results until superior performance records get posted. Moreover, Asian managers will compete against global promoters that have spent years figuring out how to sell.  The nuances of distribution and service can make a difference.”

But in spite of any challenges, Asian managers have a lot to gain from setting up Ucits funds.

By and large, Ucits has been given the stamp of approval so Asian managers have been looking to make the most of this and set up their own Ucits funds. Berman, at Mirae Asset, says: “By setting up Luxembourg-domiciled funds, Asian players gain access to the €4.9 trillion European fund market and diversify their investor base. They also gain a product that is highly marketable in their home markets and increasingly in Latin America, which could also offer opportunities to managers looking to expand their business.”

Alexeyev, of Strategic Insight, says: “Asian managers have more to gain than they think from setting up Luxembourg-domiciled funds. Setting up Luxembourg and Ireland domiciled cross-border funds opens the door to grow more rapidly in multiple markets around the world, develop relationships with global distributors that can be scaled, get on the radar of fund selectors and fund-of-funds managers, and make it easier to partner with other international organisations.”

Boomerang effect
Furthermore, Asian managers like Mirae Asset are using Europe as a springboard back into their home markets. Selling funds into Asia is a complex business as each country has its own rules and regulations around distribution and so setting up a Ucits fund to sell back into their home country can make sense for some Asian managers.

Although Mirae is currently the only Asian fund promoter with a Ucits fund, as Muller and Ferguson have attested, this trend is poised to surge.

McLaren, at RBC Dexia, says: “If Asian fund managers choose to set up Ucits to sell back into their home markets then it’s fair game. The reality is that in markets like Singapore and Taiwan, it’s still a split of offshore and onshore, but Ucits funds have a strong foothold in Asia to date.”

The fact that Asian players have had to resort to European regulation to sell funds into their home markets could be contentious.

Alexeyev, of Strategic Insight, says: “Ucits may prove to be an efficient way for some Asian fund managers to expand in their own region. Thus, they will provide more competition for the European and global managers in segments such as Hong Kong, Singapore, and Taiwan. But fund selection around performance, other quantitative and qualitative screens, and relationships will still govern who succeeds. It is also important to remember that more than 80% of the business in Asia goes through onshore local products rather than Ucits and offshore funds, so the vast majority of regional outcomes will not be immediately affected.”

©2010 funds europe

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