Despite its late arrival to the Asia Region Funds Passport (ARFP) party, NZ has made the inaugural application for export under the new cross-border regime.
In a special briefing at the Financial Services Council (FSC) annual conference last week, Hugh Stevens, head of NZX funds management, said the firm had applied to offer the SuperLife NZ Dividend Fund to Japan via the ARFP route.
“We’re the first in the world to put in an application under ARFP,” Stevens said.
NZ only completed the ARFP regulatory paperwork in July, well behind the other countries in the fund-sharing group – Australia, Japan and Thailand. Korea is expected to have ARFP regulations in place later this year.
The ARFP was established to encourage cross-border flows of managed funds in member jurisdictions without requiring product manufacturers to set up shop in each location.
However, current rules restrict eligible ARFP funds to ‘vanilla’ equities and fixed income products. Fund managers also must have at least US$500 million under management and a minimum entity value of US$1 million to offer products through the ARFP.
There are 19 NZ-based fund managers that meet the ARFP requirements.
According to Stevens, the prospect of access to larger markets in the member countries should prove attractive to NZ managers.
(Australian and NZ fund managers already have easy access to each other’s markets under the trans-Tasman mutual recognition regime – which won’t be affected by the ARFP.)
He said NZ fund firms would only need to capture a small slice of business in the offshore jurisdictions to make the ARFP effort worthwhile.
But success will inevitably depend on choice of product and securing distribution relationships in target export markets.
For instance, Stevens said the SuperLife NZ Dividend Fund, which backs into an NZX Smartshares exchange-traded fund, could find a ready audience in the yield-hungry Japan.
“The NZ share market is an outlier in [high] yield,” he told the FSC crowd.
Aside from the lure of higher dividends, Stevens said the SuperLife fund has a ‘green’ appeal given the weighting to clean energy stocks in the NZX index.
And the SuperLife fund could probably only handle inflows of $50 million from Japanese investors before reaching capacity, he said, which shouldn’t be a stretch in a country of over 126 million people – almost 30-times the NZ population.
Stevens said Japanese regulators and fund industry bodies also supported the ARFP venture.
“We’re talking to three potential distribution partners in Japan already,” he said.
The first ARFP application was relatively simple and inexpensive, Stevens said.
It wasn’t entirely pain-free, though.
Most notably, SuperLife had to amend offer documents to accommodate the more restrictive ARFP disclosure requirements. Alasdair McBeth, the DLA Piper partner who helped prepare the SuperLife application, said the statement of investment policies and objectives (SIPO) proved the most difficult to adapt.
“We had to bring in the ‘hard coded’ ARFP language into the SIPO – so it’s not a reader-friendly document,” McBeth said.
Plus there’s the small matter of tax alignment between the ARFP members to nut out but Stevens said the success of other fund passport zones – such as the European Undertakings for the Collective Investment of Transferable Securities, or UCITS – showed those issues were not insurmountable.
Furthermore, he said the ARFP could reboot the ‘fund hub’ idea that floated more than a decade ago before sinking into obscurity.
“NZ has a competitive advantage – we have the PIE and foreign investment fund rules,” Stevens said. “And it tends to be smaller countries – like Luxembourg or Ireland – that do well as fund servicing hubs.”
