Testing the waters

Eastern and Western asset managers and private banks are lining up to fight for clients across Asia. Not only does the continent account for the lion’s share of the world’s population, but it has long-enjoyed double digit savings ratios and economic growth. According to the Create-Research Consultancy, which models profitable opportunities for investment houses, Asian fund markets should be the place to be. Their compound annual growth rate forecasts – combining data from fund inflows, client numbers and demographics – runs well into the higher teens.

Pension assets in Asia ex-Japan, spearheaded by growth in Taiwan, Malaysia and South Korea, are expected to treble from their current $750bn over the next 10 years.

But before they plunge into the fray, it is necessary for banks and fund managers to analyse the market, pinpoint the area which they will attack and make sure they have the correct business model for success.

Many groups are clearly more cautious in their actions than their often hubristic rhetoric about their Asian ambitions would suggest. Of the 58 per cent of asset houses who see Asia as a growth market, less than 10 per cent see the continent as the ‘dominant’ source of their own growth, reveals research from Create.

Market penetration of Asia by global fund houses has progressed at a “snail’s pace,” according to Create’s CEO Amin Rajan, due to protectionist national regulations aiming to preserve the market share of domestic players. This is coupled with a lack of available financial instruments, such as derivatives. Institutions across the region are also forced to invest domestically, often to boost government bond issuance.

But the main reasons why the results for many groups do not yet match the potential are often cultural. “The lack of a buy-and-hold culture presents a major barrier,” believes Mr Rajan. “Even in Japan, where equity culture took root in the 1980s, investors remain momentum-driven. What they really want is a fast buck.”

It is this failure to adapt to local tastes that is hindering many foreign fund houses, which are falling at the first hurdle when assessing the potential of Asia Pacific markets and putting together a business strategy, believes Min Tha Gyaw, associate director at Z-Ben Advisors, based in the Pudong financial district of Shanghai.

Why have there, he asks, been hugely successful joint ventures and pan-Asian strategies put together by European investment product manufacturers such as German house DWS, while others have floundered?

The problem is that few foreign players have yet grasped the mentality of the Asian public. “Asian investors are buying apartments for their kids and grandkids. Then with 20 per cent of their entire net worth, they will be very aggressive and are prepared to lose sleep,” ventures Mr Tha Gyaw. “Foreign houses try to cater for the big, growing retiring population, with a conservative product, but Chinese investors have already made conservative allocations elsewhere. They are demanding an aggressive product. Foreign fund managers fail to capture this point.”

As well as getting the product right, asset managers must be keenly aware of business conditions, particularly the link between distribution and custodianship, with more and more banks seeking to profit from both activities. “Most will say to a fund house, ‘I will only take your custody if you give me a distribution mandate too’,” says Mr Tha Gyaw.

Two years ago, leading Chinese banks such as ICBC and CCB were among the main players in this game, able to be very selective in which fund houses they linked with. But the market is opening up today, believes Mr Tha Gyaw, who describes “a very dynamic situation” determined by the level of trail commissions paid by fund houses to hosting banks. “Asian banks are far more open-minded than their European counterparts, but it does get excessive from time to time. We tell our clients that banks are like mercenaries, they work with the highest bidder and loyalty lies with the biggest pocket. In a potentially huge market like China, if you have the right product, strategy and marketing, it doesn’t matter if you are a foreign or domestic player.”

Innovation in products is key to investor acceptance in China, believes Paul Burik, a former senior executive in Commerzbank’s asset management division, now engaged by the Shanghai Advanced Institute of Finance as a professor to train portfolio managers and private bankers. “Like Japan, China is about new products in a big segment of the market, much more so than in Europe or the US.”

Those houses which operate in several regions of the world report a much greater knowledge of and interest in investments in Asia than Europe.

“A taxi driver asked me today what I knew about a particular IPO,” says Martyn Gilbey, chief marketing officer for Asia Pacific clients at Mirae Asset in Hong Kong. “The challenge is how to capture and harness that kind of knowledge. How do you convert their interest into long-term investments? Most people are very short-termist in their investment horizons.”

Martyn Gilbey, Mirae Asset

‘A taxi driver asked me today what I knew about a particular IPO. The challenge is how to capture and harness that kind of knowledge’

Martyn Gilbey, Mirae Asset

Once investors in Europe have signed on for a product, they tend to stay on an investment house’s books for a longer period, says Mr Gilbey. “Our challenge is how to keep those clients who are primarily transaction and IPO driven.”

While many global players clearly struggle to sell products in Asia, there is a growing cluster of home-bred groups, which have made their mark in one country, become a market leader and are setting up offices in neighbouring states to leverage their regional expertise.

Singapore’s DBS, about to embark on a share swap with Japan’s Nikko, Korea’s Mirae Asset and Beijing-headquartered China Asset Management Company are all subscribing to this growing Asian distribution model.

Born out of the 1997 Asian financial crisis, after which the country allowed standalone mutual fund companies to exist for the first time, until recently Mirae was very Korean-centric. But since opening its first overseas office in Hong Kong in 2004, Mirae has gathered $9bn of its $55bn total from outside its home country. Domestic businesses have since been established in Mumbai, São Paolo and New York.

Mirae is in the process of registering an asset management joint venture with Chinese regulators. In Hong Kong and Singapore, high-profile distributors such as Citibank are now being besieged not just by the Western groups like Schroders, Fidelity and Templeton, but by the new breed of boys from next door. These players have done their homework, understand the local mentality and are growing according to ambitious targets.

Iris Chen, China AMC

‘People are generally worried about China, particularly about inflation and the government’s response to it’

Iris Chen, China AMC

Marketing Asian funds, not just to Asian clients, but also to customers in Europe and Latin America, is part of Mr Gilbey’s role. Mirae’s bottom-up style products typically invest in Korean, Chinese, Asia Pacific and global emerging markets equities, with Indian stocks soon to be added.

Similarly, he will introduce his local clients in Hong Kong, Singapore and Taiwan to equity funds managed in Brazil and Eastern Europe. “We benefit from being a local manager in this region,” says Mr Gilbey. “Sure, there are many established Western groups here. But suddenly the competition is getting much fiercer for them.”

While the Chinese market may not yet be as mature or saturated with financial products, forward thinking players from the country are already planning to spread their wings across Asia and also to Europe and the US.

China AMC has been building relationships with key private banks such as Citi, JP Morgan and Morgan Stanley in Hong Kong for the last 12 months. But even at the heart of this region it is no picnic convincing distributors and their clients to invest in funds buying Chinese companies.

There is widespread concern about China’s short-term economic prospects. “People are generally worried about China, particularly about inflation and the government’s response to it,” says Iris Chen, head of distribution for China AMC in Hong Kong.

Educating people to invest in mutual funds is still an uphill struggle, she admits, with home-grown investment houses often facing the same trials as foreign counterparts. Keeping clients engaged can be one of the hardest tasks. “People know that you need to invest in China, but it’s a matter of when to put their money in,” says Ms Chen. “They all want to buy at the very bottom and sell at the top. The problem is, it’s just not like trading equities. With mutual funds, you are buying into a long-term trend. If you look at price/earnings ratios, now we are at a historic low.”

China AMC launched its first Luxembourg-registered Ucits III fund in October, and is also planning a distribution campaign much further afield in the UK and Switzerland. “We are just 13 years old, but that’s how old the industry is in China. We are already the market leader in China, now we want to provide China expertise to other countries.”

Stories from some Western fund houses suggesting the financial crisis never happened in Asia are more than a little disingenuous. The cluster of angry claimants, who lost huge sums in mini-bonds and equity structured products after the Lehman collapse is testament to the shock-wave transmitted through a large segment of the region’s affluent private clients. But while this made private clients wary of markets initially, there appears to be a slow and begrudging acceptance of mutual funds, at the expense of structured products.

“When I talk to private banks, there is recognition, in that part of the market, that there has to be less reliance on proprietary structured products to be pushed through their distribution,” says Mirae’s Mr Gilbey. “That helps equity managers like ourselves, who manage pure, long-only product.”

European cross-border managers with strong commitment to the region, who were struggling to connect with disenchanted customers last year, are also noticing an improving climate. “The industry is definitely still recovering from the effects of the financial crisis, but sales volumes of investment products have improved quite significantly of late,” says Leiven Debruyne, head of Asian intermediary sales at Schroders in Hong Kong, adding a cautionary note. “Asia has nevertheless taken much longer to shake off the crisis from a mutual fund sales perspective compared to Europe or the US.”

Consultants believe that only those groups which have done the footwork and have a local brand-name and presence can succeed in Asian markets and in China in particular. Yet there are many large groups, predominantly American owned, who aim to hold their fire until national regulations are repealed in their favour.

“A lot of big US companies claim they will never do a joint venture in China. It is their corporate policy and goes against their culture, ego and brand experiences. That is why so few US companies are coming in,” claims one well-placed Chinese consultant, who believes some US players are suffering from delusion.

“Their expectation is that five years from now, regulation will be liberalised. They are thinking: ‘I am Fidelity or T Rowe Price. Everybody will open their arms and want to invest with us.’ Personally, I don’t think that will be the case.”