Ireland’s ascent as a domicile of choice for alternative investment fund managers (AIFMs) and those running Undertakings for the Collective Investments in Transferable Securities (UCITS) shows no sign of abating. In fact, the jurisdiction is rapidly gaining traction among Asia-Pacific (APAC) managers hoping to launch UCITS funds.
Fund manager interest in product distribution into Asia has been particularly strong in recent times, reflecting the regions huge potential for long-term savings growth, with UCITS remaining the platform of choice for managers from the west. Furthermore, with UCITS proving a very popular brand within APAC, a growing number of Asian managers are seeking to solicit European capital to run in Asia-focused funds. “We have had a significant uptick in the demand from APAC clients interested in setting up UCITS. In particular, it appears that Asian managers see an opportunity to provide European investors with a product that is regulated in Europe but can access China, and UCITS fits the bill in that regard”, says Tony McDonnell, managing director at HSBC Securities Services in Dublin. As to why Ireland is proving popular as a domicile of choice, McDonnell gives much of the credit to improved linkages to the region. “The industry association bodies in Luxembourg have done a fantastic job in promoting the domicile with Asian managers, and also creating an image of Luxembourg as the ‘gateway to Asia’, however Ireland is catching up in that regard. The Irish Funds Industry Association (‘IFIA’) have made enormous strides over the last two years to put Ireland on the map in Asia, and this is now paying dividends.” He does, however, point to some practical factors that are also having an impact - “there is no net assets tax in Ireland, and coupled with it being a common law jurisdiction, some managers find that advantageous. The ease of dealing with the Irish Regulator has also been mentioned by a number of clients we have been in discussions with”, added McDonnell, “with the Central Bank of Ireland engaging well with managers and being quick to respond. “
Indeed Ireland has been leading the way in innovation in 2014, proving to be the first UCITS jurisdiction to offer European investors access to the China A-Shares equity market via Exchange Traded Fund (“ETF”). The Irish-domiciled CSOP Source FTSE China A50 UCITS ETF invests directly into the China A-Shares market under the Renminbi Qualified Foreign Institutional Investor (“RQFII”) quota scheme, and according to McDonnell, this product has helped create interest in Ireland as a domicile within the Asian manager community: “there is no doubt that the CSOP launch has helped improve the visibility of Irish UCITS into Asia. Supporting this vehicle via custodian and administration services has been a very positive experience for HSBC. With our footprint on the ground in Asia and our local capabilities in UCITS both in Ireland and Luxembourg, we find that our client facing teams are well equipped to provide a consultative approach to managers in Asia, particularly those with a China focused strategy”.
It is the China link that McDonnell feels Ireland should push harder. HSBC Bank's latest Global Connections trade report for Ireland predicts that exports to China will grow by 11% per annum from 2016 to 2030, to become Ireland's 4th biggest trading partner by 2030, usurping France and replacing Japan in the top five. With this in mind, the IDA is very active with offices in Beijing, Shanghai, and Shenzhen, while many of Ireland’s third level institutions now offer courses in Chinese and many business courses now have it as a module. McDonnell feels that adoption of the renminbi as a trading currency would be a real advantage. “At HSBC, our view is that the renminbi will be one of the global reserve currencies of the 21st century. If Ireland is able to offer Chinese companies not only access to a renminbi trading partners but a supply base and business partners in financial and professional services who are also comfortable in doing business in renminbi, we will have taken a major step towards capturing our share of FDI from China.”
This increase in trade relations with China is becoming increasingly relevant as China looks to open its doors to fund managers. The country’s mutual recognition scheme, which is due to be implemented imminently, will enable Hong Kong fund managers to market to mainland investors without having to partner with a Chinese firm or apply for a license, something which has historically frustrated asset managers in the region. Home to a population with more than $13 trillion in investable assets, this spells an excellent opportunity.
While mutual recognition is still in its early days, an HSBC Global Banking and Markets paper – “International Expansion: Accessing Asia – UCITS or not?” – suggests the scheme could be extended to other jurisdictions in a manner not too dissimilar to how the Qualified Foreign Institutional Investor (QFII) and RQFII scheme were widened. McDonnell says there is an opportunity for Ireland to be included in future phases of the mutual recognition project. “China may be open to reciprocity with other markets in Asia or beyond, and the experience of QFII and RQFII suggest that it is reasonable to expect mutual recognition to be expanded at some point, however I would expect Hong Kong to enjoy at least a few years of exclusivity”. HSBC expect China to seek a balanced relationship with any new recognition partner, which is why McDonnell feels any work done in the interim to develop trade relations and to be innovative in product expansion with a China focus won’t be wasted effort.
In the short term a perfect storm is brewing which should enable Ireland to capitalise on growing Asian demands to launch UCITS products. China’s domestic stock market, which has historically been shut off from global capital, will gradually be opened up to Hong Kong institutional investors in what is known as Shanghai-Hong Kong Stock Connect (Stock Connect). The initiative is bound to attract a great number of foreign asset managers and investors, who will now be able to trade China A-shares.
“The initiative is very promising and will give China-focused fund managers exposure to the country’s equity market,” said McDonnell. “It bodes well too for China-focused UCITS managers as it will give them greater access to China,” he continues. There are, however, potential challenges to UCITS in form of APAC nations developing their own passport schemes akin to UCITS. The APEC scheme, also known as the Asia Region Funds Passport, which includes Australia, New Zealand, Singapore, South Korea, Thailand and the Philippines, has made little headway. The initiative, said the HSBC paper, is a potential UCITS substitute across those countries.
The ASEAN scheme, which is limited to Singapore, Malaysia and Thailand, is at a more advanced stage but challenges do remain. The HSBC paper said the ASEAN scheme would attract greater interest if it was broadened to include fast growing economies such as Indonesia, the Philippines and Vietnam. Nonetheless, the HSBC paper points out UCITS took 25 years to develop while the ASEAN and APEC schemes could lead to “strategic uncertainty” for asset managers in the region over the short and medium term.
McDonnell remains confident that APAC managers will continue to embrace UCITS. “I do not share the view of some that UCITS is set for a gradual decline in Asia and would expect UCITS products to continue to be used alongside onshore and regional products, as part of Asian and global strategies. The advantages of the UCITS products, particularly in the short to medium term, mean that UCITS will remain the only viable pan-Asian vehicle and the closest thing to a global fund platform. Ireland has gained traction in recent times in being a domicile of choice for UCITS and must continue to take advantage of that momentum.”
Managing Director HSBC Securities Services
Tel: +353 1 635 6201