Global shift seizes Asian wealth market

Across Asia’s wealth management markets, deregulation and increased interest in overseas investments are driving domestic fund houses to partner with third-party product providers to offer a wider range of investment vehicles to their distributors.

In Korea, where the retail mutual fund business picked up only in 2005 – largely influenced by the bull market and increased investors’ interest in high-return emerging markets products – the demand for fund management delegation or sub-advisory boomed a couple of years ago.

Domestic asset management firms, with little expertise in investing overseas, had to sub-advise to foreign firms to meet market demand, says Kenneth Kyosuk Lee, head of business development and strategic marketing at Samsung Investment Trust Management.

OVERSEAS EXPANSION

During 2007 and 2008, the firm, which is one of the largest asset managers in Korea with more than $100bn (€72bn) of assets under management – of which 40 per cent is handled in special managed accounts for group companies, including Samsung Life and Samsung Fire and Marine insurance – rapidly expanded its overseas product range, awarding mandates in areas where it lacked expertise.

At the time, there were not many international funds available on the domestic market, says Mr Lee, and the fund house wanted to respond urgently to distributors’ demands, particularly those coming from captive distribution arm Samsung Securities, through which it distributes 50 per cent of its $60bn fund assets.

In 2007, the firm launched a global water fund and a global alternative energy fund. The management of the two funds was delegated to Belgian firm KBC Asset Management. German group WestLB Mellon was appointed to manage an emerging market fund. The firm also added a Japanese equity fund. This is managed in-house, but with Nomura Asset Management acting as its adviser.

Track record, performance, and investment philosophy are very important criteria in manager selection, says Mr Lee. But flexibility on fees proved crucial at the time too, he says. In the country, where the distribution of retail mutual funds is dominated by five or six large banking networks, management fees are “very competitive”, explains Mr Lee.

Three years ago, foreign managers used to leave little space for fee negotiations; but this has changed, since managers have realised the importance of the Korean market. “When we launched the water fund we raised $1bn in three months,” says Mr Lee. “Korean retail investors are real punters.”

With the market downturn and very heavy redemptions, the size of funds decreased dramatically. This has often caused sub-advisers to terminate their mandates. At Samsung Investment, the US equity fund, previously advised by WestLB Mellon is now managed in-house, mainly by investing in exchange traded funds (ETFs). Currently, the total overseas investments of the firm amount to $2bn, of which 50 per cent are delegated or sub-advised assets.

“The period during 2006 to 2008 was a very busy one for fund management delegation, but now most of the regional and country funds have already been launched in the market,” says Mr Lee.

IN-HOUSE EXPERTISE

In the wake of the financial crisis, investors have shifted their investment focus to the broader Asia region, while the major Korean asset management firms have been doing the same for some time. During the past couple of years Samsung Investments opened offices in Hong Kong and Singapore, with the plan to expand further in the region over the next one to two years. The firm recently launched three funds investing in China and in the pan-China region, managed from Hong Kong.

“For the next couple of years, we are mainly focusing on the Asian markets and on building our in-house expertise,” says Mr Lee. He expects that when market conditions improve there may be “the next round” of sub-advisory, perhaps driven by smaller companies who want to fill a gap in the market. “Large companies have already built many resources in-house, and they may just use external managers on an advisory basis, as opposed to full fund management delegation,” he says.

Miraeasset Asset Management, another heavyweight funds group based in the Korean capital of Seoul, has implemented a particularly aggressive expansion strategy in recent years, establishing operations in Asia, Europe and Latin America. The firm, which manages more than $60bn in assets, distributes part of its fund assets through Miraeasset Securities.

OPEN ARCHITECTURE APPROACH

The firm operates on an open architecture basis, according to SungSik Cho, team manager, financial product marketing team at Miraeasset Securities. Products are sourced from major international firms with a presence in Seoul, such as Fidelity, BlackRock, Shroders, AllianceBernstein, as well as from Korean specialised firms. But more than 95 per cent of the fund assets distributed by the firm are managed in-house, admits Mr Cho.

“We are a strong brand in Korea, our clients come to us to have Miraeasset funds,” he says. In addition to the local market, Miraeasset covers most of the emerging equity funds in-house. In many cases products from third-parties – which include Schroders’ flagship funds such as the Bric and Latin American funds and BlackRock’s world mining and gold fund – are put in competition with internal products, says Mr Cho.

Open architecture could be a step towards sub-advisory, concedes Mr Cho, but sub-advising involves a higher level of commitment to clients.

“We select third-party funds in bona fide, we provide information about the fund before and after the sale, but that is most of our obligation to clients,” he says. “In fund management delegation, the whole responsibility of the performance is ours, we have to select and manage the manager and our obligation to the clients is higher,” explains Mr Cho.

Andreas Neuber CEO at UBS Hana Asset Managament, the joint venture between UBS Asset Management and Seoul-based Hana Financial Group, noted that because of the financial crisis, banks and securities firms are now focussing more on their in-house products. They do sell third-party funds, but they are still far away from a guided architecture approach seen in Western Europe, he says. “The next step will be that Korean distributors will select their preferred partners, but that can be two or three years away,” he says.

Nevertheless, Korean distributors, who used to sign up 50 distribution agreements with fund providers years ago, became aware of the high costs involved in training these advisers and the production of marketing material for a large number of funds, and have started reducing the number of their distribution partners.

Even if they have selection teams in-house, banks’ business models resemble that of a broker, as they are very commission driven, explains Mr Neuber; the commission is generated by generating interest in clients.

The percentage of Korean investors who invest in funds is still very small and, regardless of whether they are high net worth or more retail-type clients, they have very short-term investment horizons, often just three months, with very little consideration for risk, says Mr Neuber.

Mr Neuber believes the Korean fund market, which amounts to approximately $300bn, has strong growth potential, but education plays a big role in its development. “We are investing a lot of time in educating the distributors and the end investors. This very short-term oriented investment behaviour, with no risk consideration, is not beneficial to the investor,” he says.

SUB-ADVISING VERSUS FEEDER FUNDS

In Malaysia, the liberalisation of the capital market in 2006 strongly drove demand for mutual funds, especially the offshore funds, explains Sharifatul Hanizah, managing director at RHB Investment Management in Kuala Lumpur. Domestic asset managers, not having the expertise in managing funds overseas, established feeder fund structures or sub-advised to external players.

Feeder structures take up around 25 per cent of the total $3bn assets under management of the Malaysian asset management firm, which belongs to the the fourth largest banking network in the country. An external manager, UOB OSK Asset Management, is employed to manage two types of funds investing in the Asia-Pacific area.

Indeed, both the feeder fund structures and the sub-advisory mandate were set up by RHB when it was just a distribution house and the asset management activity was housed under a separate entity. Since the merger between distribution and asset management last year, the firm’s focus has shifted to building internal expertise.

BUILDING EXPERTISE

“Firstly, we want to focus on building our internal expertise for both domestic and international markets, adds Ms Hanizah. “But where we do not have no expertise or no exposure or no ability to build skill set we will consider obtaining that expertise through strategic partnerships,” she explains.

“When you delegate, first you have to look at the expertise, the track record and performance of that manager, as well as his ability to deliver the performance target and the investment objective of the fund to be established,” says Ms Hanizah.

“This is important because you are doing that for your investors, your clients and you want to have a product that meets their requirements.” The financial side in terms of fees is also important, as is the possibility to tap into technical expertise, she says.

Similarly to Korea, in Malaysia, during the last couple of years, domestic fund managers generally built up their skills in managing offshore investments through joint ventures or simply by building up skills, she says.

“The need to outsource equity mandates may not be on the increase, but you do see demand for sub-advisory still there, especially for the most exotic asset classes,” says Ms Hanizah.

AmInvestment Management, part of AmBank Group, one of the largest Malaysian banking groups, whose major shareholder is Australia’s ANZ Bank, also uses feeder funds to give its distributors access to global or regional products. “Our core competencies are in Malaysia and in Asia-Pacific ex Japan region,” says a senior figure at the firm.

“Beyond that, we use feeder funds to meet market demand for global funds, or for hybrid or thematic asset classes,” he says adding that, sub-advisory is an option that they are “very keen to explore”.

TRANSPARENCY AND CONTROL

In Singapore, DBS Asset Management, the funds arm of DBS Bank, introduced the multi-management concept to its clients more than ten years ago, through its partnership with Russell Investments. “Our existing multi-manager programme is the longest lasting multi-manager programme in Singapore,” says the group’s distribution head, Adrian Ku.

Having the ability to invest in all the managers on a segregated basis where inflows or outflows vary depending on asset allocation, would be ideal, as it provides total transparency in fund holdings, says Mr Ku.

But this is not always possible. “We are trying to find a total solution, but in most cases, that is not openly available, so you have to invest in existing funds,” he adds.

In the case of a stand-alone product, sub-advisory arrangements are more accessible, he says. More than 20 years ago the firm appointed its first sub-adviser, Daiwa SB Investments to manage Japan equities. Other sub-advisory agreements were made to manage asset classes such as funds of hedge funds, global small caps equities ex Asia, global real estate.

“DBS AM uses third-party managers in the areas where we feel we do not have the best investment expertise or to meet particular demand from clients,” says Mr Ku. The decision whether to sub-advise or to feed into an existing fund depends on operational framework, efficiency, costs and control, he says.

“If the existing fund does not meet the regulatory requirement, a segregated approach is the only route. For investment reasons, to have a more bespoke product, you also need a segregated account.”

However, the possibility to set up a sub-advisory mandate also depends on external managers, who have different economies of scale, and comfort zones.

“Historically most of the managers would just want us to feed into an existing offshore fund,” he explains.

Currently, of the SG$22bn ($15bn, €11bn) total that DBS AM manages, third-party products represent around 10 per cent, split between fund distribution and sub-advisory.

While in the very early days the tendency was to work with large reputable global asset managers, now there is a tendency to be more open to explore working with more specialist managers, says Mr Ku.

But regardless of size, external managers need be able to provide a good level of service. “Investment-wise, they have got to service us like any institutional client, from back-office, middle office, right to the front office,” says Mr Ku. “On the marketing front, they have to be able to support, together with our distributors the end clients who have invested in the fund or want to invest in the fund.”

Looking forward, Deborah Ho, CEO at the Singaporean firm, which also operates from a number of locations in Asia, points out that Asia as an investment region is going to be much more important in the future. This may apparently mean a reduced need for international solutions. “In the wake of the financial crisis, there has been a tendency in the market to want to invest closer to home,” says Ms Ho.

“The market in Asia has been outperforming, and the selection of investment vehicles now available to investors is greater, so in that respect there has been less open need to look for other strategies,” says Ms Ho. But because of this crisis, “there is also the need for investors to consider more longer-term, truly diversified wealth management solutions,” she says.

Investors were “hit by the punting bug” and hence suffered quite significantly during the crisis, she says. And people listen most when they are suffering. “I think investors have now become more receptive to the concept of long-term investing and diversification globally across all asset classes, and that will encourage them to look for more comprehensive solutions.”

Hong Kong banks favour supermarket approach to keep customers on board

In Hong Kong, most banks, including private banks, do not manage clients’ assets on a discretionary basis, but like a supermarket, make sure to keep their shelves stocked with a wide range of products to meet clients’ needs, explains Nicholas Leung, senior vice president, investment products and advisory department at Bank of East (BOE) Asia.

“In Hong Kong, banks fully believe in open architecture,” says Mr Leung. “We help the customers to pick the right product, providing them with the right information so they can make an informed decision,” he explains. “But it is investor who makes the decision.”

Questioned about the risk that relationship managers, who get paid on a transaction basis, may be driven to push products to clients, he says that “it is the relationship with the customer we care about the most. We help our customers otherwise they will just go away from us.”

Mr Leung says his bank “could not emphasise more” about the importance of asset allocation and diversification, but if investors come to them and want to do certain transactions, they certainly cannot reject that trade. “We cannot just educate them ourselves; the whole of society should be working on it.”

Bank of East (BOE) Asia, which is the largest independent local bank in Hong Kong, has 20 distribution agreements with fund providers, including Schroders, Invesco, AllianceBernstein and also in-house BOE AM, which is considered just as one of the many business partners, says Mr Leung.

Around 1000 fund units are available on the BOE platform. “If I see the demand for a new product, and I find a good product, I will add it to the platform,” he says. “If I think we need more relationship managers, then we will hire more people,” he says. On the other hand, number of funds may also decrease, if they do not raise interest.

“I have become more cautious about putting new funds on the platform, in order to minimise product replication.”

Because of the crisis, investors’ interest has shifted from investing in equities, China, emerging markets, Latin America and Russia, which have suffered the most at the end of last year, to bonds.

“I see a lot of investors are turning their focus into bonds or bond funds. People now are more cautious about their investments and about market volatility,” explains Mr Leung.