TAPPING INTO PRU’S GLOBAL NETWORK

“In Malaysia we are fortunate, because as a company we have multiple channels of distribution,” says Thomas Cheong, chief executive of Prudential Fund Management Berhad (PFMB) in Kuala Lumpur. He should know, as with the firm, which is part of Prudential plc, the UK-headquartered international financial services group, Mr Cheong got familiar with the distribution dynamics of the Asian region, having covered various management roles in the company’s headquarters in Hong Kong, as well as Singapore and China over the past decade. “In China, the only distribution channels are the banks,” says Mr Cheong, who headed the business in the country for five years, “but in Malaysia we can distribute through banks, through insurance agents, through brokers and through independent financial advisers.” Prudential has a growing mutual fund presence in Asia with operations in India, Taiwan, Hong Kong, Japan, Korea, Singapore and China as well as Malaysia, where the global group has great hopes to build its Islamic asset management hub, leveraging on the firm’s capabilities in Sharia funds and insurance products. Having had a presence in the Malaysian insurance space for 85 years through Prudential Assurance, PFMB was incorporated in 2000 as Prudential Unit Trusts Berhad and later changed to the current name to reflect the broader business focus in the institutional asset management space. Indeed, of the total R15bn ($4.26bn) managed by the firm, around R11bn are assets managed as mandates, in investment linked insurance products, for its sister company. A big player The remaining R4.3bn ($1.2bn) is in unit trusts. “Prudential is a remarkable example of how an insurance company can be a big player in the fund management industry,” says Mr Cheong who says that the firm is the fourth largest domestic player in retail assets in the R164bn Malaysian fund industry, behind the top three fund houses Public Mutual, AmInvestment and CIMB-Principal, which are all bank-owned. While the bulk of the unit trusts assets are still distributed through the banks, which dominate distribution at national level and have increasingly embraced an open architecture model, the firm has about 10,000 tied life agents, of which more than 20 per cent are licensed to distribute unit trusts. Independent financial advisers made their appearance in Malaysia only a couple years ago. “IFAs are still in a development stage but we are working very closely with one of the largest to grow that as a distribution channel.” To devise your distribution strategy, you have to look at the stickiness of the money and the types of customers you will be interfacing with, says Mr Cheong. Banks in Malaysia are looking to sell the hot product of the month to their customers, although the financial crisis has made this approach slightly more subdued. “Banks tend to churn products on a regular basis; they have volume but money is not very sticky,” he says. The stickiest money comes from the agents and the IFAs, says Mr Cheong, as these channels have developed close relationships with their clients and are able to give personal financial advice. “We work with banks to launch new products and then with agents to replenish the pot; our pot of money starts off with very volatile AUM, but over time we replace a portion of that with very sticky AUM, so that the fund will be more stable.” If a product is selling well with the banks, agents are also spurred to sell it. “Through banks, we get visibility and then agents will then be reinforced in terms of their confidence to sell it,” adds Mr Cheong. The stickiness of the money depends on the types of investors: “Banks sell to anybody who is interested to invest and as a result, there is no much loyalty from customers, as cash investments tend to be made for quick returns.” But agents will sell typically investment linked insurance products to individuals up to the age of 40, after which “when health conditions start deteriorating, and the costs of premiums go up,” will offer their clients retirement planning products, or unit trusts, as by that time people will have accumulated enough money for their retirement and will need to find avenues to invest them. “Unit trusts are a growing portion of the agents’ business,” he says. Developing new ideas In distribution, it is important to have a good mix between products having a long-shelf life, but also be able to come up with new ideas to draw distributor’s attention. “Traditional plain vanilla products like bond funds or balanced funds which have greater longevity are important in your product line up, but going forward we are looking at thematic long-term funds, such as a dedicated China, India or Indonesia fund, because these are markets that will continue to develop, or an agriculture or a commodity fund,” he says. “I will not be looking at launching some sexy funds which last for a 2 to 3 year period.” Prudential Fund Management offers to its distributors both domestic funds and funds that invest overseas, mainly within the Asia Pacific region, where the firm has investment capabilities. “When we invest overseas we tap into the knowledge of our local investment teams, we do our own research and we supplement it with the research done by our sister companies in the region and that allows us to do stock picking in a more systematic manner,” says Mr Cheong, stating that this is an important differentiating factor for the company, supposedly one of the few that in Malaysia have access to a global network of fund managers. The firm will leverage on its asset management joint ventures in the region, in India with ICICI bank and in China with China International Trust and Investment Corporation. “In Indonesia we run our own business and have investment expertise; for commodities and agriculture we have a regional research team as well as our global research team in London we can tap into.” Global investments The firm also offers a couple of global funds that feed into existing global products managed by M&G, the UK and European fund management business part of Prudential group. Funds investing overseas are “very popular”, says Mr Cheong, because Malaysian investors tend to invest directly in the domestic stock market, which they are familiar with, but they favour funds when investing in offshore markets which they don’t know them that well. “People just want to diversify their investment risk, from just the local market to other markets,” he adds. Offshore funds were introduced in the Malaysian markets in 2005 and since then have gained ground. It has to be said that a number of players have launched so-called global funds, although many are allocated mainly to emerging markets and Asia ex Japan in particular, as these are the markets investors feel comfortable with. Regulation has also loosened rules, gradually increasing to 50 per cent the amount of a fund that a domestic player can feed into an existing offshore fund managed by a third-party firm. A global fund that is drawing investors’ attentions is Prudential’s M&G global basics fund, based on the consumption theme, which invests in global companies that are seen as building blocks of the economy, says Mr Cheong. As the economy gets stronger, the fund will invest in more commodities – basic materials – and will move some of its investments towards high-end consumption products as these are in demand when the economy recovers, says Mr Cheong. External products managed by groups such as Schroders for a global fund and Alliance Bernstein for an Asia-Pacific equity blended product are also being increasingly used for clients. “To select the third-party, we would look at the investment performance of the funds, which is a key consideration. Other factors that we would consider is whether our distributors want to work particularly with them,” he says. “It was actually a suggestion of our distributors, the banks, that we teamed up with Schroders and Alliance Bernstein” says Mr Cheong. But third-party managed funds are a small part of the business and something they are not looking to do too much, he says. “As a fund management house, we would rather actively manage our own funds.” Some of the Prudential’s competitors have embraced the sub-delegation path, to offer their clients a more tailored product. But Mr Cheong does not believe delegation is an avenue he will take in the future. He will rather appoint his investment teams in the region on an advisory basis. “They will give us advice on stock selection, on the economy, on the market outlook, but we would not sub-delegate, we will manage the money ourselves.”