Setting foot in overseas markets

Domestic economic and regulatory pressures, coupled with on-going fallout from the eurozone crisis, are pushing global wealth and asset managers to explore new opportunities overseas, especially in emerging markets.

The global shift of economic power from West to East however, along with increased costs of compliance and doing business, is constraining serious offshore expansion drives from private banking hubs in Zurich and Geneva.

These factors led fast-expanding Swiss group Julius Baer to buy Bank of America Merrill Lynch’s wealth management arm. As a result, the private bank doubled its presence in Asia, with Western European client assets now making up just one third of funds, compared to 40 per cent previously.

Research from Julius Baer predicts Asia’s wealth market will more than double by 2015, as the number of high net worth individuals in the region surges towards the 3m mark. China is set to dominate in terms of numbers of potential clients, followed by India and South Korea.

Cross-border investment management mergers and acquisitions have reached more than €1.2bn in deal value since January 2011, according to consultancy Deloitte. And a further €1.2bn worth of deals are in the pipeline, expected to be soon realised.

But this journey is fraught with challenges, and numerous failures have resulted. Global wealth managers find competing with local domestic players, who know the home market well, is an arduous task. That is why entering fast-growing foreign markets through a series of joint-ventures or partnerships is becoming an increasingly viable option.

Boris Collardi, chief executive of Julius Baer, called Asia a “very important market”, referring to the Eastern Continent as the Swiss private bank’s “second home”.

The demand for client relationship managers will surge twice as fast in Asia Pacific, compared to the rest of the world by 2013, according to a PricewaterhouseCoopers survey.

“Growth in developed markets has slowed down,” says Tom Meier, head of Julius Baer’s Asian operation. “If you are not in Asia, the question is: do you want to leave these markets untapped?”

If a private bank wishes to grow seriously, emerging markets have to be included, he says. But wealth managers need to ask themselves: “How do you access these markets?”

To venture into the Chinese mainland, the bank formed a strategic partnership with the Bank of China (BOC). “This made regulatory sense, as the banking regulatory environment is different in China,” Mr Meier says.

The partnership involves client referrals and joint marketing initiatives. When Julius Baer clients require banking services, these are referred to BOC, while BOC refers clients with international private banking needs outside the Chinese mainland to Julius Baer. The banks also cooperate on product distribution, financial market research and initiatives related to investment conferences. As part of the deal, the units of Bank of China (Suisse) were also integrated into Bank Julius Baer.

“The mainland China market is very different from Singapore and Hong Kong,” says Mr Meier. “We found that the most efficient way to tackle the onshore difficulty was through the tie-up with BOC. If you cannot service clients because you don’t have offerings, it makes sense to direct them to a partner that can offer complementary offerings,” he says.

Similarly, Geneva-based private bank Union Bancaire Privée (UBP) last year launched an asset management joint venture with Taiwan’s Chung Wei Yi, based in Hong Kong and Taiwan, in an attempt to target Asia for growth.

The Hong Kong business, UBP Asset Management (Asia), focuses on Asia ex-Japan and serves both local clients and UBP's global client base seeking access to Asian markets.

The partnership between UBP and Chung Wei Yi is established on the sharing of a common vision, which is to build a successful asset management operation in Asia, says Kai Lawrence Lo, chief executive of UBP Asset Management (Asia). “The complementary strength between UBP and Chung Wei Yi makes the foundation of the relationship,” he says.

While UBP has the technical know-how, Chung Wei Yi, through its local market knowledge, can assist in the distribution of products and services. Indeed, while Chung Wei Yi requires strong investment expertise for managing its insurance funds, which UBP is able to provide, UBP counts on Chung Wei Yi’s support to raise its profile and generate new assets through its local network.

WORKS BOTH WAYS

However, the increasing tie-ups are not just between global and domestic players. Last year, Julius Baer took over Macquarie’s Asian private wealth portfolio. Under this arrangement, it was agreed that Julius Baer would refer investment banking clients in North and Southeast Asia to Macquarie, while Macquarie would refer private banking leads to Julius Baer. This way, Julius Baer, mainly a portfolio manager, is able to utilise Macquarie’s expertise in investment banking, while Macquarie is also able to focus on its key strengths.

Swiss bankers are also looking at establishing footholds on the Arabian Peninsula, as a crackdown on tax evasion is leading their European and American private clients to pull funds out. “Pictet is planning to expand its asset management business in Dubai,” said a Dubai-based spokesperson for the bank.

Meanwhile, Lombard Odier plans to double assets under management for Middle Eastern clients to as much as SFr15bn (€12.42bn) over the next five years. Banque Privée Edmond de Rothschild, Mirabaud & Cie and Vontobel are other private banks that have opened offices in Dubai during the past five years.

Several other fund managers are also expanding into new territories. Invesco, which recently bought a 49 per cent stake in India’s Religare Asset Management Company, is a case in point. But few have made a transition as complete as that at Schroders, once seen as the quintessential UK asset manager, deriving the lion’s share of its business from major domestic pension plans. Schroders has however totally reversed its business model. Moving from 70 per cent UK-sourced business five years ago, the fund house now sources 70 per cent of managed asset internationally and just 30 per cent from UK clients.

A quarter of Schroders’ total assets under management is sourced from Asia, and the company aims for that to reach one-third in five years, seeing the US and Asia as the growth markets against the weakening business environment in Europe and the UK.

RISING TO THE CHALLENGE

When entering new jurisdictions to win clients, especially in emerging markets, financial services institutions face numerous challenges. “As newcomers, global wealth managers do not have a deep understanding of local market conditions and knowledge and face tough competition,” admits Mr Lo at UBP. “Global players normally compete with other international firms to promote offshore services and products.”

As overseas investments usually account for a much smaller portion of clients’ needs as compared to local allocations, many markets are already saturated with global product providers and competition is intense, he explains.

In some cases the asset managers find themselves unable to sustain what initially looked like an interesting proposition. One example of this is Fidelity Worldwide Investment, which sold-off its funds and exited the Indian market earlier this year, as even after seven years of operation, it did not reach the break-even point.

“It was a business decision taken by the organisation,” says a Fidelity spokesperson. “After several months of reviewing our business in India, we came to the conclusion that our global model stood in the way of growing what is otherwise a business with good growth potential.

“We did not see scale for ourselves unless we adopted a more local model in India, which would include a large number of small offices spread across the country, offering only local products,” the spokesperson continued. “Fidelity’s success globally comes from its ability to run retail money as well as large pension or unit-linked mandates across markets through its integrated global investment management platform. But here, when we talk of retail money, it is very different.”

Press reports stated Fidelity focused only on investors in the top cities, thereby pursuing niche strategies. This strategy was reportedly followed at the expense of expanding into smaller towns, as domestic and joint venture managers are used to doing to increase their brand reasonance.

Also, Fidelity’s mode of fund distribution was seen as contributing to its failure. The company chose only to deal with the largest banks and institutional distributors and ignored the many independent financial advisers who work closely with asset management companies to sell their funds.

“Products offered by global players may not fit local demand and investment needs,” says UBP’s Mr Lo. “Moreover, they may not know where and how to approach the right clientele to promote their products and services.”

STRUGGLING TO COMPETE

In many emerging markets, foreign cross-border third-party manufacturers are struggling to compete with the largest domestic brands, especially looking at asset numbers, rather than flow numbers, according to Cerulli Associates.

Domestic players, on the other hand, tend to be trusted and well-entrenched, especially in markets such as Australia, which tend to be very domestically-oriented, says Vincent Duhamel, head of Asia Pacific and Japan at Lombard Odier.

“This can be due to brand recognition, which in China is a huge concern,” he says. “We have found that the best way to enter China is to combine with asset managers, as it is easier to gain traction because institutional investors are usually less worried about branding.”

Often in many emerging markets, brand awareness is more important than service quality or performance, say UBP’s Mr Lo. Also, given the recent financial crisis, investors are more cautious in dealing with foreign players and choose to work with well-known names for security reasons.

Wealth managers going into Asian markets also face regulatory constraints, as many regulators in emerging markets do not encourage overseas investments, as they are perceived to expose clients to higher risks. “In China, for example, wealth managers can only enter markets through joint-ventures and in India, capital costs for foreign firms are significantly higher,” says Shiv Taneja, managing director at Cerulli Associates.

“In certain markets, there is also the issue of foreign exchange control,” says UPB’s Mr Lo. “Sometimes, barriers are put up in order to protect domestic players.”

Other challenges lie in recruiting the right talent, especially if the global player lacks brand recognition or suitable products.

“As an investment manager, you cannot manage assets in Asia from overseas,” explains Mr Duhamel at Lombard Odier. “You need to hire local talent, who know the language and culture.”

The key task for a wealth manager is deciding how to reach the client base, says Sebastian Dovey, founder of Scorpio Partnership. “You have sales teams that have demonstrated success,” he says. “The question is do you just hire new sales people or build new platforms? We have seen that wealth managers are typically poor at building platforms.”

Another concern includes obtaining the right licence, especially in those markets where one comes at a significant cost. “We have found that getting a trust licence in Singapore is difficult,” says MrDovey. “The capitalisation requirements are higher than in Hong Kong.”

Other factors he says need to be considered include whether to establish an onshore or offshore presence, product structures and types plus charges levied for each type of service.

Asset managers also need to establish what their client base is and how they will reach them. Often, asset managers hire teams from other institutions, which is a quick solution, but the conversion rates of assets tend to be low, says Mr Dovey. “Now there are more local, credible players than earlier, so the brain drain which domestic banks saw frequently is not happening so much anymore,” he says.

“Domestic managers are getting better and building a competitive force. This is especially true with Asian banks, such as DBS and Bank of Singapore building a stronger presence.”

In such a competitive scenario, global players need to be prepared to take financial losses for the first few years in order for their business to grow. Therefore, entering markets via a joint venture or a tie-up looks attractive.

Lombard Odier, which has set up successful partnerships in South Korea and China and worked with banks to offer wealth management services in Japan, announced a partnership with JBWere in Australia earlier this year. “The partnership was the best way to enter the Australian market, as we were able to penetrate a market in a way which would have otherwise taken us 150 years,” says Mr Duhamel.

Nevertheless, building successful tie-ups is not always a cakewalk. “We have seen joint-ventures do well in Australia, and China is another market where they are popular,” says Scorpio’s Mr Dovey. “However, we have seen that in Japan, as in the case of Mitsubishi UFJ Merrill Lynch, they have not worked.”

The reason, he feels is that the advisers of the two different banks were not well-aligned, and thus failed to achieve as much as was originally claimed.

Another market where joint ventures have not worked well is India. The Indian asset management industry shrunk by more than 3 per cent to Rs6tn (€8.65bn) last year, according to a report by Cerulli Associates, with foreign firms finding it particularly tough to operate in an environment of high inflation, high interest rates, slowing gross domestic product, and a weak domestic stockmarket.

Global fund managers operating in the country through a joint venture, such as ING Investment Management, JP Morgan Asset Management, AIG Global Asset Management and Mirae Asset Global Investments, all posted losses in each of the previous five years, the report stated.

“Rules in India regarding scale and requirements have now changed,” says Mr Dovey. “However, entering most emerging markets is still complicated.”

STRATEGIC FIT

While on paper, a joint venture between an international firm and a domestic partner looks like a sure-shot formula to success, in order to have a successful practice as a joint venture, both partners should see a strategic fit and have similar plans for the business, says Amit Shah, executive director of IIFL Private Wealth Management, an India-based wealth manager.

“Their relative skills in terms of experience across asset classes should complement each other,” he says. “There must be synchronisation across both teams and investment strategies.”

Also, the ability and willingness of both these partners to adapt their business models needs to be gauged, believes Mr Shah. “Needless to say, it is not easy for all these conditions to be met.”

However, it is important that fund managers tailor their distribution set-ups according to the country they are targeting and not club all Asian countries together, says Cerulli’s Mr Taneja.

For instance, research by Cerulli indicates distributors in Taiwan are “known to be very activity driven”. Therefore, fund houses need larger sales and marketing teams on the ground to conduct road shows and events. In contrast, in Malaysia, fund managers need less marketing and sales people in-house as sales are effectively carried out by tied agents.

In spite of the various challenges and failures, joint-ventures are likely to continue, says UBP’s Mr Lo. After all, when done right, “a joint venture can reduce the challenges which a global wealth manager would otherwise have faced when entering into a new market,” he says.