Will global mutual fund flows in the next five years primarily benefit cross-border Luxembourg and/or Dublin fund domiciles or will the asset management industry see the emergence of an Asian passport and reduced interest in offshore products?

Traveling from Asia, Europe, Latin America and the US in the last few weeks, the topic of fund domiciles was part of each of my discussions with governments, regulators, associations and CEOs.

Before the crisis this questions would have been a joke, but now the prospect of an Asian fund passport is a possbility and the media is adding fuel to the fire.

A bit of background:

This year, cross-border fund flows in Europe accounted for almost 90% of all net flows, a massive shift from a local to an offshore business in the region over the last half decade.

Moreover, in 2007 (pre-crisis), the majority of those cross-border flows came from investors in Asia, prompting many international firms to ramp up their Asia distribution expansion plans by registering their Lux funds for sale in the region. While 80% of Asia assets were still held in local funds, the hope was that Asia would follow in Europe’s footprint and shift to a cross-border business around the global UCITS brand.

Then came the crisis.

First, the Lehman minibond and accumulator scandals brought fund sales to a screeching halt, then regulators started putting applications on hold to assess the damage to the vehicle and the UCITS brand.

Now, with the opportunity of RMB products and HK as a gateway into China, the HK government sees the “HK advantage” as a chance to knock out its frenemy Singapore and at the same time call for a local fund domicile to bring jobs and expertise into Hong Kong – Prof KC Chan is taking the “HK advantage” on the road to Europe (Q4/2010) and the US (Q1/2011).

Alfi decidedly was not happy to hear that message in HK (although the SFC was a bit more cautious and supportive), and pre-emptively positioned a local lobbyist to help save and maintain the Luxembourg and UCITS brand and business.

Still, nobody in the industry was really thinking that the fragmented region would be able to coordinate and implement a pan-regional Asia passport – at least not any time soon.

Last week brought a new twist to the story, from down under.

Australia’s Financial Services Council, eyeing an opportunity to go beyond bilateral agreements and to heat up the discussion, commissioned a report by PWC that concluded that an Asian fund passport is critical for the industry’s growth. The CEO of the FSC then went on to say that Asia should learn from the EU when they first launched UCITS. We might be five years away from the reality of an Asian passport, but its possibility is being discussed and pushed by multiple players with vested interests in the region.

Thus, the industry in Europe, dealing with potentially massive regulatory changes in the aftermath of the financial crisis involving an alphabet soup including UCITS IV, Prips, EAD, AIFMD, RDR – needs to add one more battle ground to its growing list: defending UCITS in Asia.

We have discussed this issue in greater detail in our recent book “the seven secrets of fund distribution”.