New Zealand punches above its weight
New Zealand firm first to be approved to distribute funds across borders under an Asian funds passporting scheme
Good things take time. That’s been the story for the Asia Region Funds Passport (ARFP),which in January achieved a major breakthrough when New Zealand’s Smartshares Limited became the first asset manager in the world approved to distribute funds across borders under the scheme.
The ARFP initiative was first proposed by Australia at the meeting of Asia Pacific Economic Cooperation finance ministers in 2010. It became operative in February 2019 after eight years of sustained inter-governmental efforts. The current participants are Australia, Japan, New Zealand, South Korea and Thailand.
The scheme aims to streamline regulatory processes for cross-border fund distribution by enabling mutual recognition of fund licensing so that asset managers in participating countries will be able to offer their products to retail investors in each other’s jurisdictions without having to set up shop locally.
It is Asia’s answer to the European Union-based UCITS funds, which have for more than three decades dominated cross-border funds available to meet the demands of retail investors in the Asian region.
Wellington-based Smartshares will now be able to offer its approved fund for distribution in the other participating member countries based on the rules specified in the ARFP memorandum of cooperation, according to a statement from the Financial Markets Authority (FMA), New Zealand’s fund management industry regulator.
The 25-year-old Smartshares is the New Zealand bourse’s wholly-owned fund management arm, providing pension, insurance and investment solutions. It currently has around NZ$8 billion (US$5.4 billion) of assets under management after recently gaining NZ$1.8 billion from its acquisition of ASB Superannuation Master Trust.
Smartshares Chief Executive Officer Hugh Stevens was a member of the original group appointed by the New Zealand government in 2010 to launch fund passporting in the nation. He is particularly proud that his firm is the first in the world to hold the Asian funds passport.
In an interview with Asia Asset Management, Stevens says Smartshares submitted an application to the New Zealand regulator shortly after the ARFP became operative. The approval process took almost two years as the firm worked with the FMA to put in place the final details of the New Zealand oversight regime, including the nature of home country disclosures.
Rules of host jurisdictions currently differ significantly with regard to disclosure requirements. The FMA and Smartshares have been working to strike the right balance between simple explanations of investment policies and risks which retail investors can understand, while also ensuring compliance with the more technical language used in New Zealand regulations and the passport rules.
“Now that the critical approval process has been completed, the next step is to develop distribution partnerships in Japan, the first country we expect to target for distributing our funds, and produce the fund offering documents in the local language,” Stevens says.
Smartshares will offer its New Zealand Dividend Fund in Japan through the passport. The fund tracks an index of the 25 highest dividend paying stocks on the New Zealand Exchange, including sustainable electricity producers such as Meridian Energy, Mercury and Contact Energy. Its market capitalisation was over NZ$90 million as of January. Stevens is betting that the fund’s higher dividends and ‘green’ appeal will be attractive to yield-seeking Japanese investors.
Japan’s Financial Services Agency (FSA) does allow funds offered through the ARFP scheme to be based on their home country documents and language. But Stevens will likely produce the documents in Japanese as well as revise the risk language to meet local expectations, even though this may take another 12 months before the fund is ready for subscription. He believes this extra effort will enable the fund to get off on the right footing, and pave the way for other funds to be distributed in the Japanese market in future.
Viable opportunity
It came as a surprise to many that New Zealand was the first to gain the Asian funds passport. New Zealand asset managers are not internationally known and its asset management industry is small compared with other ARFP members such as Australia, Japan and South Korea.
According to data from the Reserve Bank of New Zealand, the industry had NZ$257 billion of total assets under management as of end-September 2021.Pension savings account for almost half of the assets, which has seen steady growth since 2007 after KiwiSaver, a voluntary retirement saving scheme, started operating. As of September, total assets of KiwiSaver funds were around NZ$91 billion, and that of other superannuation funds were around NZ$36 billion.
Institutional investments represent 80% of the industry’s assets, and retail unit trusts account for 20%. Around 60% of the total is invested in New Zealand and Australian assets. International equity and bond funds are typically managed offshore, and often by a third party with a mandate provided by the New Zealand manager. The size of the market does not justify management of international investment by a New Zealand-based manager
Despite its remote geographical location and its small population of just over five million, the New Zealand government has been collaborating with its financial industry to punch above its weight.
Back in 2010, the government established a taskforce to look at New Zealand’s potential benefits as a fund domicile and funds administration centre. The taskforce’s report affirmed a viable opportunity for New Zealand to build on its existing capability as a domicile and administration centre for local and foreign collective investment funds and alternative funds.
The task force made a number of recommendations, including changing tax rules to exempt non-resident investors from paying tax on their foreign-source income, and promoting mutual recognition of funds with major Asia Pacific regulators.
New Zealand was among the first participants in the working group for the ARFP initiative proposed by Australia. The FMA, in conjunction with other government agencies, has since enacted several new regulations to allow New Zealand’s participation in the scheme to open new markets for its fund managers as well as to broaden the investment options available to its investors.
In 2019, an industry-led group sponsored by the New Zealand Exchange and the FMA was formed to identify ideas to improve and grow the country’s capital markets, taking a ten-year view. The Capital Markets 2029 report reviewed various components of the markets and recommended a whole range of actions to improve their depth and efficiency, including the asset management industry.
Key GDP contributor
New Zealand’s financial and insurance services sector contributed NZ$17.8 billion, or around 5.5%, to the country’s NZ$324 billion gross domestic product in 2020, according to the government’s statistics website. It was the second fastest growing contributor over the past 40 years after the professional, scientific and technical services sector.
“The growth of an export market for New Zealand fund managers will support the nation’s domestic funds management industry, protecting local capability to support local services for New Zealand investors such as KiwiSavers,” Stevens says.
He believes that New Zealand has some really good examples of socially responsible investment opportunities. If fund managers can package them into products and then enable retail investors around the Asia Pacific region to invest in them, that would be a great opportunity to get more regional investors involved in New Zealand’s economy. Over time, there is also an opportunity to channel more of the region’s capital into New Zealand’s high-quality primary production sectors which need investment.
Stevens does not feel that Smartshares was a lonely crusader in its ARFP journey. He has a lot of support from the FMA, which is keen to get the first passport fund off the ground. The Japanese regulator has also shown a lot of interest in assisting the firm’s fund to be passported to its market.
It took over three decades for UCITS to develop popularity in Europe and also become a global brand since it came into operation in 1988. The ARFP is still history in the making. Smartshares’ breakthrough has cleared some doubts about the workability of the scheme’s framework. But there will be scepticism until its fund is successfully launched in Japan. As a pioneer, it’s a test of resolve and patience for Smartshares.
*This article was published in Asia Asset Management’s March 2022 magazine titled “Punching above its weight”.
