Adapting to an ever-changing landscape
Category: Asia, Australia, China, Korea, Singapore, Global, United Kingdom
By Hui Ching-hoo
Fund distributors discuss pros and cons of operating in Asia
Asia Asset Management, in conjunction with BNP Paribas Securities Services, held the fifth in its series of regional Quintessence CEO Luncheon events in Hong Kong on July 13. Topic of the day was ‘Distribution Strategies in Asia: Issues, Challenges and Opportunities.’
Lawrence Au, head of Asia Pacific at BNP Paribas Securities Services, began by explaining that the aim of the gathering was to learn what opportunities fund managers had observed as a result of changing patterns taking place in Asia’s fund distribution space.
Tan Lee Hock, Asia Asset Management’s publisher and moderator for the event, then threw the cat amongst the pigeons by asking the participants what they thought defined and drove distribution success for asset managers in Asia.
According to Andrew Lo, chief executive, Asia Pacific at Invesco Asset Management Pacific, from the clients’ perspective, the definition of success is dependent on their satisfaction with the products and services they have paid for. “It is important to have discussions throughout the value chain, which includes fund managers and distributors that work together to deliver products and services. For fund managers, it’s about the ability to produce the right alpha for clients on a consistent basis,” he remarked.
Mr. Lo continued: “This is not only the concern of institutional investors – there will be a merging between institutional and retail in terms of the scale of operation and investment processes over time.”
Jean-Pierre Leoni, head of Asia-Pacific at AXA Investment Managers Asia, noted that brand recognition is the one of the key factors when it comes to recognising a distributor’s success in Asia; he also added that performance is considered to be crucial in the retail market.
Pointing to the impact current economic conditions have had on on retail distribution, Gerry Ng, chief executive officer, Asia ex Japan at Baring Asset Management (Asia), stated that retail statistics revealed that it has been very much a risk-off environment so far this year. He explained a lot of investors were wary of putting excessive amounts into equities as they were uncertain whether the market had hit rock bottom or not. Therefore, capital flow has been driven into fixed income, especially the high-yield end of the spectrum, which is perceived to be much safer, in Mr. Ng’s opinion.
Isabella Chan, director, sales and marketing at Franklin Templeton Investments (Asia), echoed Mr. Ng’s view. “In the retail space, investors have become more sceptical and risk averse when they invest. According to our report, fixed income sales for 2012 accounted for 50 – 60% of total sales in the industry. Among fixed-income products, we’ve seen a new category, namely high-yield funds, which constituted around 30% of the sales. Investors favour fixed-income assets because of the low volatility and steady cash flow associated with them.
“From a fund house standpoint, we’re counting on our ability to adapt to the changing requirements and demands from distributors and regulators,” Ms. Chan said.
Mr. Lo pointed out that the distribution requirements made have been far more critical since the Lehman Brothers debacle. “Distributors now have to offer more value-added services. For example, they need to explain the investment processes to their clients, especially when the market is on a downward cycle,” he revealed.
According to Mr. Leoni, the mentality of Asian retail investors is still very short-term. This mind-set contrasts starkly to European investors where the investment horizon for long-term equity portfolios is up to several years.
Despite the region’s distribution platform in the retail space still being dominated by banks in Hong Kong, Ms. Chan says there has been a steady flow coming from insurance companies in the aftermath of the 2008’s global financial crisis. “The switching pattern of investment-linked plans (ILPs) is not as frequent as the conventional retail distribution platform, she added.
“Insurance companies have racked up significant market share in Hong Kong over the past five years to as much as 20%. Retail banks currently account for around 68% of the market while private banking and individual financial advisors (IFAs) make up of 5% and 7%, respectively,” Ms. Chan claimed.
Mr. Ng explained that retail banks have a strong advantage over rivals such as IFAs as they are able to leverage on their ample resources to access the deposit bases of their clients.
As for the part IFAs play, Ms. Chan observed that the IFA market in Hong Kong still lags way behind markets such as Singapore or the UK. She also pointed out that the market presence of IFAs is significantly eclipsed by retail banks.
Clients can get free advice from IFAs in Hong Kong. In the UK and Singapore, advisory fees are more stringent. For example, the UK’s Retail Distribution Review (RDR), which will come into effect by the end of 2012, stipulates that advisory firms must explicitly disclose and separately charge clients for their services. Likewise, the Monetary Authority of Singapore (MAS) recently released a consultation paper on proposed amendments to the financial advisors act in May.
Mr. Lo said Hong Kong can learn from these overseas experiences when it comes to standardising its own IFA advisory services. Overseas regulators have scrutinised practices [of IFAs] and made significant changes – some of the new procedures have been driven by incentives and fees and commissions have been restructured.
In addition, the IFA industry is very well-developed in countries, particularly Australia, because of very complex tax systems. Aussie IFAs can help clients resolve tax issues whereas their Hong Kong counterparts are solely focussed on investments.
Securities brokerages are allowed to offer fund advisory services in Hong Kong and China. However, Ms. Chan questions whether brokerages are well-enough equipped to handle these tasks as their focus is on securities trading rather than mutual funds.
To further facilitate fund distribution, Hong Kong has set up a committee to work with bodies such as the Hong Kong Monetary Authority (HKMA) on straight-through processing (STP) initiatives, which will enable the entire trading process for capital markets and payment transactions to be conducted electronically. “The committee has discussed introducing a common standard across the industry as only a few players are using STP or electronic transmission to trade,” Ms. Chan pointed out. “The usage of STP will help to cut down on back office costs.”
Mutual fund coverage in Hong Kong compared to its regional rival Singapore is less widespread as the Lion City’s pension scheme – the Central Provident Fund (CPF) – has a longer history of investing in mutual and feeder funds.
Mr. Ng claimed Taiwan’s market is more mature than Hong Kong’s due to its lofty levels of savings. “The percentage of overall savings flows is very substantial in Taiwan compared to Hong Kong.” In terms of brand recognition, Mr. Ng said: “For the institutional side, the public pension schemes’ always tend to go for brand names in the first instance. When they start to diversify their pools, the brand factor will become less important.”
However, Mr. Lo proclaimed that brands are not the only factor large institutions take into account – they sometimes focus more on their fund manager’s area of expertise. “As a result, large institutions may not be the best outfits to generate alpha,” he stated.
In terms of product trends, Mr. Leoni explained that some institutional clients, including pension funds, have displayed a preference for multi-asset absolute return strategies rather than taking purely long-only and benchmark related approaches.
In support, Mr. Ng added: “People know that if the benchmark is down 5% and the yield is down 3%, they are still losing money. Therefore, they want inflation-plus or HIBOR-plus-like products. The objective is to beat inflation.”
Ms. Chan then declared: “We are sometimes going for simple product structures due to the current regulatory landscape. The Securities & Futures Commission (SFC) expects product manufacturers to have all the relevant disclosures in simple terms in the aftermath of the global financial crisis – so simple products are easier to get through the regulatory approval process. In addition, we’ve seen more offerings in different currencies – most mutual funds were denominated in US dollars a few years ago.”
As for the offshore RMB bond market, Mr. Lo claimed that an oversupply of dim sum bonds and a weakening RMB appear to have cooled down demand. However, he said he expects the scale of the RMB onshore and offshore bond markets to overtake regional rivals such as Japan in the long run. This, he said, is because of the development of the China’s capital market is catching up fast with its economic growth.
As a low yield environment is expected to persist over the next two-to-three years, Mr. Lo believes it will be much harder for investors to make quick profit. However, he did note that they could reap returns of around 8 – 10% per annum by investing in quality equities in the mid- to long-term.
According to Ms. Chan, the current environment favours established players. “Spiralling operating costs are the main stumbling block for new start-ups,” she said. “For example, in the old days, new houses just needed a headcount of one for their client services – now they need at least two to three people to handle these tasks. They also have to put more resources into IT to meet with regulatory requirements.”
In regard to the distribution of money market funds in Asia, Ms. Chan claimed capital inflows to them are lukewarm in the region, adding that banks have little incentive to sell the funds. “They prefer to offer their own wealth management products to money market fund investors who have redeemed their investments,” she proclaimed.
UCITS and the rest
Singapore, Hong Kong and Taiwan have had the greatest success in Asia with UCITS funds despite most offshore funds in the region originating from Europe. “These three regions are not very large UCITS markets. When you consider economies of scale, it is very expensive to develop onshore funds for a population of seven million people, like Hong Kong,” Mr. Lo said. “But if you look at the MPF scheme in Hong Kong, it has to be local because it is a retirement savings scheme.”
Ms. Chan observed that due to local regulatory restrictions, fund houses sometimes have no choice other than to go for local products. She added that UCITS and cross-border distribution still play a significant part in the rising economies of scale.
Ms. Chan gave an example: “Franklin Templeton deploys a common system throughout many countries when it comes to distributing UCITS funds. However, we have to put in a lot more capital investment when it comes to local funds. For instance, markets like Korea and Japan have their own languages and restrictions, so we have to outsource to third parties.”
She continued: “For certain markets, it makes sense to leverage on UCITS or SICAV structures because they are cheaper. We won’t use the same umbrella to have more products and higher flexibility unless the market is very large in size for local products.”
Mr. Ng added: “Fund houses tend to launch products in the form of local funds –only if they think UCITS is getting more complacent in terms approval. For instance, getting the fund onto the market can be much slower if the product approval process is carried out in Dublin or Luxemburg rather than in Hong Kong.”
As for other non-UCITS international structures, such as British Virgin Islands (BVI), Mr. Ng said he prefers to keep the product structure simple in order for them to be used in as many jurisdictions as possible from a business perspective. He claimed offshore jurisdictions were less appealing than UCITS as it is the ‘gold’ standard in over 60 countries.
Mr. Leoni pointed out that AXA IM has UCITS funds registered in Dublin and Luxemburg as well as joint ventures in the Asia Pacific region to develop domestic products. He said the firm deploys its global system in markets where the UCITS network is in place – “Products are easier to sell with UCITS passports in neutral countries,” he professed.
In recent years, there has been much talk of an Asian fund passport, similar to UCITS – potentially this could be a mechanism that would facilitate fund distribution across regional borders.
Mr. Ng asserted that the Asian market has had some good platforms in place, “so an Asian passport is a low priority for most firms. It may be more valuable to Aussie players as they want to make inroads to Asia though,” he said.
Ms. Chan believes an Asian passport may be viable for small domestic-dominated countries in Southeast Asia such as Malaysia, Indonesia, Thailand, Philippines and Vietnam to help open up their fund markets. On top of that, she said a Greater China passport would be a good idea, bearing in mind that there is still a long way to go before the China, Hong Kong and Taiwan markets can be bridged.
Mr. Lo admitted he was sceptical over whether Chinese fund managers would benefit from an Asian passport. “Even though they allow offshore funds to be distributed in China, I cast doubt on the passport being well accepted – Mainland investors are more accustomed to onshore funds.”
He added: “More importantly, China needs to simplify its regulations to facilitate a free flow of capital and promote Shanghai as a global financial centre.”
Looking ahead, Ms. Chan said she hopes the industry will strengthen its ties with the regulator in order to streamline approval processes. “The sooner products are approved; the more diverse choices will become for the investors.”
With a greater variety of products on the market, Ms. Chan asserted that fund manufacturers will have to work more closely with banks and distributors to rationalise their offerings in terms of product design and development. “We also need to collaborate with our partners to ensure that the stability and suitability of products is in place,” she remarked.
Discuss: Adapting to an ever-changing landscape