Look East: is Asia the future of the fund management industry?

by

3 Jul 2012

The fund management industry is in a state of flux facing both major internal and external challenges. The industry has become much more competitive. Institutional investors are more sophisticated and highly critical: they will no longer tolerate average performance from fund managers. That has caused a Darwinian shake-out of the industry with only the fittest surviving.

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The fund management industry is in a state of flux facing both major internal and external challenges. The industry has become much more competitive. Institutional investors are more sophisticated and highly critical: they will no longer tolerate average performance from fund managers. That has caused a Darwinian shake-out of the industry with only the fittest surviving.

“The only way to be successful with Asian institutions is to have a product that will potentially offer higher returns than your competitors,” adds Gerth. “The fund manager must either have a unique existing product or be prepared to come up with a bespoke solution.”

Guy Henriques, head of Asian institutional business at Schroders, continues: “There’s no question that selling to Asian institutions is a very competitive market. But there are still tremendous opportunities for good western fund managers because many of those organisations, including both central banks and sovereign wealth funds, are only just starting to diversify their assets.”

This is not a market, however, for mediocre firms; it is only accessible to those firms with a strong business in the area that fits well with the institution’s diversification plan. Approaching the large institutions is not the only way that companies can access the Asian markets. For those fund management companies with some experience of providing either sub-advised products for a defined contribution or retail platform, this can be another way for pension schemes to access the Asian markets.

“If the fund manager’s aspiration is to increase the assets under management outside of the existing distribution network, then teaming up with a bank, insurance company or a brokerage firm to develop a sub-advised product is the best way to achieve this goal,” says Gerth.

If the firm has a global brand with best-inbreed product then this will be attractive to any potential Asian distribution partner. Equally attractive is a large organisation with a broad range of capabilities that enables the firm to create a bespoke sub-advised product for the distribution company that will fulfil unmet need. “This sub-advised model only requires a light operational infrastructure with a hub in Asia that can deal with queries in the right time zone,” Gerth explains. “The only time a fund manager needs to build a large distribution sales force is if the firm wants to target the retail market.”

Whichever approach a fund manager decides to take, expansion into the Asian market is not a decision to be made lightly.

Charles Beazley, chairman and chief executive at Nikko Asset Management, says: “Too many western fund management firms have thought that they could get rich quickly in the Asian markets and then disappeared as soon as business got difficult. This builds resentment and distrust.”

Roy Stockell, head of Asia Pacific asset management at Ernst & Young, concurs: “The Asian market wants western managers to commit for the long term. They have been bitten many times by managers who only come when times are good. It’s no accident that firms that have been here for a long time do well. A brand is more important in Asia than it is in western markets.”

For those companies which do decide to bite the Asian bullet, the medium and long-term growth prospects look good. Not only are there considerable opportunities for those firms which can develop new products for the more sophisticated Asian markets, there is tremendous, if somewhat nebulous, long-term potential in the undeveloped markets.

One of the unintended consequences of the one-child policy in China is that the country has one of the most rapidly ageing populations in the world and yet has no formal retirement infrastructure. While it’s impossible to predict how the Chinese government will attempt to address this problem, it is a nettle that will have to be grasped sooner or later.

Stockell says: “The Chinese work force currently numbers around 280 million people. If the Chinese government introduced a mandatory retirement savings scheme for those in employment, there would suddenly be a pool of people that would be greater than any other population in the world, with the exception of India. Even a tiny proportion of that potential market would translate into significant earnings for fund management firm.”

Fund management firms which are part of a larger publically quoted banking group governed by the quarterly reporting cycle may be at a disadvantage to privately run firms which can afford to have a longer term strategy. “It’s a global asset management firm job to ensure it can take advantage of any opportunity that arises anywhere in the world,” Henriques believes. “We’ve made a long-term commitment to the Asian region. We know this commitment means a lot to our Asian clients. While it’s difficult to predict exactly how the less well-developed markets like China and India will evolve, the potential is enormous and we’ll be well-positioned to take advantage of that evolution.”

Firms that decide to take a long-term commitment to Asian markets should take a slow and steady approach to building up their market presence: a smaller investment reduces the pressure to generate high levels of profits. Slow and steady wins the race. There are tremendous medium and long-term opportunities. But those fund managers looking for an easy escape from the pressures of the European and US markets will be disappointed. Success in Asia will not be simple. It will require long-term commitment, strong products and strategic vision.

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