Despite a relatively high entry barrier over 20 New Zealand fund managers could benefit from the just-signed Asia Region Funds Passport (ARFP), according the Financial Markets Authority (FMA).
Under the regional passport Memorandum of Co-operation – inked last week by the NZ government along with representatives from five other Asia-Pacific jurisdictions – fund managers require at least US$500 million under management, capital of more than US$1 million and a five-year track record to boot.
“We understand around 24 New Zealand fund managers are likely to meet the basic eligibility criteria for the Funds Passport path,” the FMA told Investment News NZ (IN NZ). “It is expected that an increasing number of New Zealand fund managers will qualify over time as the industry develops, particularly with the growth of KiwiSaver.”
Based on current exchange rates, a New Zealand entity would need almost NZ$720 million under management to jump the first hurdle. It is understood very few NZ managers outside the larger offshore- or bank-owned fund businesses would hold the base US$1 million (or about $1.4 million in Kiwi) in capital.
Under the rules contained in the 146-page ARFP agreement, managers would need additional capital to the tune of 0.001 times their funds under management (in $US terms) to join the regional investment party, capped at US$20 million.
The ARFP lists a host of other eligibility requirements covering staff experience and education levels, record-keeping and admin, outsourced services, custody etc.
While NZ is the smallest economy covered by the ARFP – which includes Australia, Japan and Korea – the FMA said it would not be swamped by the larger funds management power of the other members.
“The New Zealand view is that the Passport initiative does create opportunities to export. More competition is good for investors in all jurisdictions including New Zealand,” the FMA told IN NZ. “The good news for NZ fund managers is that they have bigger markets to sell to relative to the larger economies. For example, a NZ business having access to Korean markets gains more than a Korean business gaining access to a NZ size market.”
The Philippines, Singapore and Thailand also contributed to shaping the ARFP but have not yet signed the agreement.
As well as the core manager eligibility hurdles, the ARFP puts tight constraints on products that can be offered under the agreement, requiring all Passport-approved funds to be “highly diversified, vanilla investments”.
According to the ARFP document, Passport-compliant funds can only invest in “currency; deposits; depository receipts over gold; transferable securities; and money market instruments” with firm limits on use of derivatives. The agreement also sets standards for performance fees and prohibits short-selling.
The FMA said fund managers could nontheless offer a range of products within the ARFP ambit.
“There are almost unlimited combinations for how fund managers may construct their funds under the rules, so there are plenty of opportunities to innovate and differentiate,” the regulator said. “Also being able to offer funds into New Zealand at an Asian scale could in itself lead to new economic benefits – for example, the scale of funds could potentially lead to lower fees.”
The FMA said the requirement for diversification under the Passport would lead to the offer of funds “that consumers would regard as being robust”.
“In addition, the diversification rules make the funds more compatible with the requirements of other Asian countries, so the diversification is a characteristic that facilitates the scheme,” the regulator told IN NZ.
“Over time as jurisdictions become more comfortable with cross-border offerings in the region the initiative may pave the way to other agreements that see other kinds of product introduced.”
The ARFP Memorandum of Co-operation comes into force for the four original signatories as at June 30 this year with the ultimate aim to include all Asia-Pacific Economic Co-operation (APEC) zone countries.
“Participating economies have up to 18 months from 30 June 2016 to implement domestic arrangements in accordance with the rules,” the FMA said in a release.
Managers will have to apply for a special ARFP licence to join the Passport regime.
New Zealand already has a mutual recognition agreement with Australia that allows trans-Tasman investment products to be offered in each jurisdiction without the need complete dual offer documents.
Over 100 Australian products under the agreement are listed on the Disclose website. IN NZ understands very few NZ managers have made their products available in Australia.