Asset consultancies are seeking to get hired by Asian institutional investors for ‘delegated investment management’ mandates and fund of funds management — areas that are typically the preserve of asset managers — as their traditional advisory services struggle in the region.
However, their interest in doing so risks drawing accusations of conflicts of interest from the clients they are targeting, as well as from the asset management firms they are increasingly set to compete with.
It is common for asset consultancies to offer a wider range of investment services in the US and UK, but not in Asia. The treasurer of an Asian pension fund told AsianInvestor that he expects this to change, and for consultants to gain traction by offering such investing advice.
“In both cases consultancies can generate management fees on AUM, and it allows them to leverage from their existing in-house research teams, which are extensive,” he said, adding that he does not use them for such investment product advice himself.
Peter Gunning, chief executive for Asia Pacific at global investment consultant Russell Investments, said large investors in markets such as China, Korea, Japan and Taiwan wanted research support to help them build their own multi-manager portfolios. They are also looking for specialist services such as transition management, currency risk management and overlay services, which Russell is supplying, he added.
Consultants argue that by providing funds of funds they can provide a service similar to advisory, but at a lower fee (since much of the manager selection research has already been done by the advisory business).
Mercer might use the same managers that it would have recommended under an advisory model, but the cost dynamics are more favourable, Garry Hawker said. He added that Mercer was “looking at acquisition options” in this space.
Naomi Denning, the departing Asia-Pacific head of investment services at another leading consultancy firm, Willis Towers Watson, told AsianInvestor that clients might sometimes think they were getting a tailored strategy but were instead getting something like a packaged product while overpaying for it.
Despite recent pressure on fees, consultants believe there is room to profitably provide fund of fund services at a lower cost than conventional asset managers, particularly in sectors such as alternatives, the US pension fund executive said.
“Fee savings negotiated with asset managers on behalf of our clients make a big difference,” said Denning, who pointed to the practice of pooling the firm’s global client base to get a better fee deal.
Hard road ahead
However, it’s far from clear that consultants can easily migrate to offering discretionary investment services and fund-of-funds products.
One challenge facing them is internal dynamics. Many advisory professionals at consulting firms dislike the introduction of new fund products, fearing that doing so will steer their services back towards the one-off advisory projects they were trying to avoid, the US pension fund executive said.
At the same time, top salespeople in consultants charged with selling the funds are often experts in Asian investment strategy, and as a result they tend to face pressure from colleagues to help with their advisory work.
“The danger for product staff is that they get sandwiched between the global product head and the local agents in Asia,” a Hong Kong-based executive for a second US pension fund said.
Even if consultancies can solve the internal politics, they will have to fend off charges of conflicts of interest from both their asset owner clients and fund houses as well.
“For the funds business there is conflict, because you look to your investment adviser to recommend fund options for particular asset classes, and there will generally always be an own-branded solution suggested,” the Asian pension fund treasurer said, adding that delegated investment management services entailed less conflict.
“You’ve got to think that there will be some very firm restrictions put in place [over conflicts of interest] by regulators and by consultants’ own clients in Asia,” said Ashley Dale, chief business development officer at Harvest Global Investments, the international arm of China’s Harvest Fund Management.
For their part, consultants deny being conflicted when offering direct products. Denning said: “One thing we don’t do is march into our clients and flog them funds.”
Meanwhile, Garry Hawker, Singapore-based director of strategic research for growth markets at Mercer, stressed the importance of being transparent about what Mercer was offering.
Asset managers are also quick to question whether consultants can succeed in their sector. “It takes a lot of time, effort and money to build up the track records, the right products and instil a culture,” Dale said.
Perhaps the biggest problem for the latest reorientation effort by consultancies is a lingering market scepticism about the merits of fund of funds management.
The model has lost popularity in the years since the 2008 global financial crisis, mostly because investors have not seen returns to justify the fees charged. Some, including Dale, describe it as a “broken” model.
But Denning believes that a combination of expertise in research and the fee savings provided by pooling multiple institutional clients, means consultants can succeed in this business.
Ultimately, they may have little choice but to try, as their advisory businesses continue to struggle to make profits in the region.
Please click here for the first part of this in-depth look at consultants in Asia. And look out for the entire feature in the June/July edition of AsianInvestor, out now.