Offshore Funds Set to Continue Reign in Asia

Offshore funds set to continue reign in Asia
Push for funds to be locally domiciled are unlikely to dent the offshore dominance

July 2018, Singapore. Cross-border funds in key offshore markets in Asia—Taiwan, Hong Kong and Singapore—look set to continue thriving in the medium term, despite regulators’ determination to grow their onshore businesses.

Cross-border fund AUM in Asia ex-Japan climbed 18.6% to nearly US$166.6 billion last year. These include assets in Korea, Taiwan, and Singapore. All three markets witnessed double-digit growth in their offshore AUM last year, buoyed by market appreciation, with Singapore leading the pack with a 33.3% jump. Over a longer period, Singapore’s cross-border AUM has grown the fastest too, albeit from a lower base: assets recorded a compound annual growth rate (CAGR) of 19.3% between 2013 and 2017.

Offshore funds in Taiwan, Hong Kong, and Singapore look set to continue their reign. This is despite regulators’ determination to grow their onshore businesses through various incentives, as in Taiwan, or upcoming fund structures like the Singapore Variable Capital Company and Hong Kong’s Open-ended Fund Companies. Regulators in Singapore and Hong Kong are working on guidelines for the new fund structures, but it is still too early to tell if these will dent the dominance of offshore funds.

Hong Kong has seen a steady climb in the number of onshore products. Efforts to boost the local market through the Mutual Recognition of Funds has had some success, with managers increasingly looking to domicile funds there. However, one cannot ignore the lead maintained by Luxembourg-domiciled funds in overall assets, at 66.1% as of March 2017.

Meanwhile, UCITS funds have not lost their shine. Asian managers looking beyond their home markets tend to see launching UCITS funds as a preferred strategy for expansion, while global managers would likely use this structure to expand their businesses in key Asian markets.

“Both locally domiciled and UCITS products will have a complementary role to play in offering investors their choice of products with exposure to relevant investment strategies, and most importantly, delivering on performance,” said Leena Dagade, associate director at Cerulli. “UCITS are here to stay in the region and will maintain their lead, at least until the time regulations evolve.”

Over the long run, regulatory efforts to position their respective markets as domiciles of choice for foreign fund houses may reshape their asset management sectors. For now, offshore funds in the three markets still dominate—and will likely continue to do so in the medium term.
These findings and more are from The Cerulli Edge—Asia-Pacific Edition, 3Q 2018 issue.

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