Extreme volatility in financial markets, driven by uncertainty about the direction of the world’s leading economies, is driving more distributors of investment product, asset management companies and big financial institutions from around Asia to collaborate with global partners.
The sub-advisory model is gaining traction around the region, but differently from how it grew up in the US and Europe. Whereas sub-advisory services in the West have been a transactional, arm’s length experience, akin to selling a product, sub-advisory in Asia has evolved into a partnership model.
Financial players throughout Asia are rapidly building capabilities to be more than just a local firm, catering to local clients with a purely domestic offering. Sub-advisory partnerships point to a different way of doing business, one that allows a local securities firm, wealth manager or fund management company to build a more complete suite of products and services, and meet the growing demands of their clients.
“Distributors can scour the world trying to identify hot products, but this is a scattergun or perhaps venture capital-like approach, with some big hits and many losses,” says Oliver Bolitho, managing director at Goldman Sachs Asset Management in Hong Kong.
“Or they can choose one or more specialists as their partner, to provide a sub-advisory service. Distributors can then focus on managing their client base, while taking advantage of a global firm’s economies of scale.”
Market volatility and dislocations are accelerating this trend, as finding the latest trendy product becomes impossible to sustain.
“The end-client wants a better approach, a smarter approach,” says Lloyd Reynolds, Singapore-based managing director and head of sub-advisory at GSAM. “Likewise, financial institutions are looking for a more intelligent approach to raising assets and retaining clients in a difficult market environment.”
This means complementing their local investment capabilities with one that is international. What’s required are core building blocks and advice around asset allocation, to allow domestic institutions to create a more complete service. From there it is easy to add products that can generate potentially higher returns, be they long-only or alternative.
For example, GSAM is working with Tong Yang Securities in Korea and RHB Investment Management in Malaysia to create asset-allocation portfolios, enabling these partners to provide a full range of risk-adjusted propositions.
In both cases, the Asia-based firm is working exclusively with a global investment manager across many parts of its business. With both Tong Yang Securities and RHB Investment Management, relations extend to multiple parts of the group, from portfolio management to distributing investment products and wealth-management ideas.
Such arrangements do require partners to cede some control over a part of their value chain. “Our partners acknowledge they are not going to manufacture everything,” notes Bolitho. “This is new for many financial institutions, but those that try to manage the asset class and product selection may lack the resources or the analytical capability.”
Even the biggest, most sophisticated institutional investors sometimes struggle to overlay a suite of third-party investment managers with cohesive asset allocation. For them, a sub-adviser model is also evolving, with an emphasis on knowledge transfer, as these big investors enter more niche product areas.
For example, insurance companies in Asia have a promising growth outlook, and may be able to maximise that by focusing on sales and distribution, while letting a specialist partner focus on investment management .
Another change in sub-advisory relations is how to make a deeper partnership work. That requires the global player be on the ground, says Reynolds. “One criteria to be in this business is to provide a broad spectrum of products, including local ones,” he explains.
This is not to go head-to-head in competing in local markets. It’s to give the local institution additional products that have different investment styles, to enable the firm to sell local solutions throughout the business cycle.
Partnership models, because they are long-term and not based on one-off transactions, also make it easier for global firms to engage in knowledge transfer, training and educational efforts – within limits set by local regulations.
This is a reality that many Asian institutions are facing as they seek to grow their businesses across borders. Banks, brokers and fund managers throughout Asia are in the process of setting up regional operations. Global firms such as GSAM have already gone down this route and have experience and connections they can deploy for partners, to help them reach their cross-border objectives.
For example, GSAM is working with RHB Investment Management to look at how it can do business in Southeast Asia, in particular in sharia-compliant product areas. This represents the biggest change in how sub-advisory relationships are evolving in Asia.
“It’s a partnership of equals,” Reynolds says. “It’s not about a global player telling a local firm what to do. Our partners have regional and even global aspirations. Both parties need to gain, both economically and in terms of knowledge transfer, from the partnership.”