Providing outsourced services to asset managers is harder on a pan-regional basis in Asia than in markets such as Europe or the US, due to the fragmented nature of the markets and linguistic barriers in the region.
But those same factors that make it difficult for service providers also mean outsourcing can be the way to go in Asia, says Andrew Houston, Bangkok-based co-founder of US firm Amba Research. Hence, he expects to see growing demand by asset managers in Asia -- and those elsewhere with interests in the region -- for outsourcing certain services, such as research, risk management and compliance reporting.
New York-based Amba last week published a white paper titled Outsourcing as a Profitability Driver in the Asset Management Industry. The study examines the 2008 annual reports of 10 leading international asset managers, as well as looking at other research.
It concludes that asset managers should consider outsourcing functions where either economies of scale are not enjoyed or best-in-class operational efficiencies cannot be achieved due to the absence of a technology platform or a dearth of skills. More specifically, outsourcing can help increase efficiency and performance in areas such as distribution, risk management and reporting, and research.
Houston tells AsianInvestor that of these areas, possibly the most significant issue in Asia is distribution. "The region's so fragmented that it's difficult to reach all potential investors," he says. "If you look at a regional or country mandate, there's a very wide range of potential investors, looking for global, regional, country or thematic exposure."
As funds investing in Asia ex-Japan tend to be smaller than their European or North American counterparts, the cost of accessing all potential investors is higher as a percentage of assets under management, adds Houston. That lends an advantage to those firms with a big global distribution platform when they launch funds in Asia.
From a broader perspective, to provide full outsourcing services in the region, firms need to provide them in Japanese and Mandarin as well as in English, he says.
However, while outsourcing throws up challenges in terms of being able to provide a strong pool of services, the very fragmentation of the market also means there are some particular advantages of using outsourcing in the region.
"For example, outsourcing to a firm in India to help you cover stocks in the sub-continent when you are an asset manager based in North Asia or Europe would be a very good example of gaining an affordable local presence in emerging markets," says Houston.
Of course, the outsourced-services market is less well developed than in the US or Europe, but that is set to change. "Over the next 20 years, the asset management industry in Asia is going to see tremendous growth," says Houston. "Demographic trends in India and China are going to lead to much higher mobilisation of local savings into global markets as well as the regional markets."
Domestic asset managers in Asia will need support to help them distribute to a global pool of investors, he adds, while global investors will need support to tap the Asian savings pool. The industry is likely to grow much faster in Asia than it will in the developed markets, says Houston, and that growth is going to drive demand for outsourced services.
Amba provides investment research and analytics support services to firms such as asset managers and banks in the global capital markets industry.