Why Coronavirus in Cayman Risks Trillions of Japanese Assets
With COVID19 spreading in the Cayman Islands, MATTHEW FEARGRIEVE explains why ¥70 trillion of Japanese offshore assets are at risk
1 APRIL 2020: the world’s largest offshore financial centre, the Cayman Islands, has reported 15 cases of COVID-19 and one death. The chief medical officer has confirmed that the Cayman Islands now have “community transmission” of the virus. The islands are in lockdown, with a nightly curfew and all flights cancelled. There are reports of the islands’ premier, Alden McLaughlin, allowing in one British Airways flight in the coming days, to enable out-of-work expats to leave.
In this article we will consider the potential devastating impact of the virus on the 4,000 financial services workers in the Cayman Islands who administer JPY70 trillion of Japanese assets currently under management in Cayman investment vehicles. We start with an overview of Cayman’s investment industry.
Cayman Islands Financial Services
The news that the virus has arrived in the Cayman Islands and claimed its first casualty will only add to the woes of fund managers worldwide, in whose Cayman-domiciled investment vehicles an estimated US$7 trillion of assets are under management. This figure, the only official one currently available, is taken from the 2018 Investments Statistical Digest of the Cayman Islands Monetary Authority (CIMA), the jurisdiction’s financial regulator. This figure is likely now to be higher, given the long-running bull market that was only recently killed off by the pandemic.
Of this US$7 trillion, approximately US$650 billion (¥70 trillion) is Japanese investor money, and is held in Cayman Islands unit trusts and hedge funds.
Japanese investment in Unit Trusts
The Cayman Islands unit trust is the most popular structure for institutional investors in Japan like pension funds, which require a safe and easy-to-use investment vehicle for their retail members. The Cayman unit trust has long been the vehicle of choice for these investors, given its similarity to the Japanese domestic investment trust, and historical tax benefits. Investors gain some comfort from the perceived benefits associated with having an independent professional trustee responsible for the oversight of the fund and an independent trustee holding the legal title to the fund’s assets.
In addition to the Cayman unit trust as a traditional home for Japan’s retail investment monies, Prime Minister Shinzo Abe’s economic reforms in recent years have emboldened Japanese institutional investors to expand their universe of eligible investment products. This has led to an increased number of alternatives managers in the US receiving Japanese mandates, either to use their existing Cayman-domiciled funds or to establish bespoke investment structures (akin to funds-of-one, or managed accounts) in Cayman.
The net position as at Q2 2020 is that around ¥70 trillion of Japanese investment is under management in Cayman Islands unit trusts and investment funds.
There are, however, some other numbers which take on a worrying significance in the wake of the arrival of coronavirus in the Cayman Islands.
Cayman Islands Population
The 2018 Compendium of Statistics, produced by the Economics and Statistics Office of the Cayman Islands (ESO), provides the most up-to-date official population and census figures in the three islands that comprise the Cayman Islands: Grand Cayman, whose largest centre George Town is home to the country’s financial services industry; Cayman Brac, and Little Cayman.
The ESO population figures for 2018 tell us that the Cayman Islands had a total population of some 65,000 people, of whom 4,425 were employed in the country’s financial services industry. Unsurprisingly for the 100 square-mile British Overseas Territory, financial services is the country’s biggest employer, with most offices being in George Town on Grand Cayman, the largest of the three islands with a population of some 34,000. These figures are for 2018, and are expected to be somewhat higher today.
But the ESO statistics make clear one salient fact: that the Cayman Islands’ US$7 trillion asset management industry is serviced by a group of people which in number would be easily contained on two or three floors of the average Tokyo office block. Nearly all of these 4,000-odd people live on an island that is 76 square miles in size. Nearly all of these people work in George Town; all 10 square miles of it.
Operational Risk to ¥70 trillion of Japanese Assets
Indicative mortality rates provided by the World Health Organization are around 4%, but authorities acknowledge the potential for this to be considerably higher. Consider the number of workers currently in self-isolation or who have yet to manifest symptoms; there are not yet any official statistics for what proportion is represented here of the working population of each affected country. It has been reported that the number of cases of COVID-19 in the US is currently at around the 4,000 mark, which puts the US ahead of China in terms of infection.
It is easy to see the risk that a fast-spreading virus poses to a small, concentrated group of people living on an island of 76 square miles, with limited infrastructure and resources, and a restricted capacity for obtaining help from beyond its borders.
It remains to be seen how the virus will impact the workforce in the Cayman Islands, in terms of mortal and economic cost. But at present it has to be said that there is a serious operational risk to US$7 trillion of global assets managed in Cayman-domiciled investment vehicles. We know from the ESO figures that there are around 4,000 people who service these entities. Introduce COVID-19 into this population and in a short space of time there is not enough personnel to carry on the essential daily maintenance of them. As yet, there has been no indication from the islands’ financial services bodies or its government of any crisis management plan. Given the size of the islands, their extreme geographical isolation and their small population (with the skilled sector thereof being even smaller), it is difficult to see how the world’s largest centre of offshore assets could possibly carry on as normal were the virus to take hold.
Fiduciary (trustee) and management companies (there are around 140 resident in the Cayman Islands, with real infrastructure and skilled personnel); cash and custodian services (there are some 200 banks and trust companies in the Cayman Islands, themselves holding around US$1.8 trillion, or 7% of global banking assets); unit issuance and valuation (there are around 90 fund administrators in the Cayman Islands); oversight of the fund’s management by Cayman-resident trustees; and provision of basic registered office functionality. The failure of these operational functions poses a substantial operational risk for Japanese institutional investors with US$650 billion invested in Cayman Islands unit trusts and investment funds.
MATTHEW FEARGRIEVE is an investment management consultant. You can read more of his blogs on how coronavirus will impact the asset management industry here:
