International fund houses have continued to visit Asia with an eye on establishing operations in the region, but they have been advised to think very carefully before taking the plunge.
Stewart Aldcroft, chief executive of Citi Trust Services in Hong Kong, speaks to at least five asset managers planning expansion into Asia in an average week, and he has some sobering words of warning for them.
“For companies, whether they are here or not, it is getting very difficult to get on to the distribution platform. If you come to this market and you can’t get your product sold, there is no point. If you only have average products and they don’t stand out, forget it," said Aldcroft during a panel debate at the Asifma conference in Hong Kong yesterday.
Banks dominate 80% of fund distribution in Hong Kong and Singapore, and they have continued to consolidate their product line-up.
Frederick Laydon, Asia chief operating officer at Principal Global Investors (PGI), said the region was a long-term play. “It takes a while to reach scale in Hong Kong. In Asia it takes a fair amount of time for success to evolve,” he noted, speaking on the same panel as Aldcroft.
Laydon said he arrived in Hong Kong in 1998 to help set up Principal"s MPF business but it took the acquisition of AXA’s MPF business in September this year for it to reach scale. Principal is now the fifth largest MPF product provider.
PGI, which historically has been focused on segregated accounts in Asia, has been moving to grow its mutual funds business and is facing the challenge of getting onto banks’ shelves.
“Most platforms we are approaching to take us on are trying to consolidate," said Laydon. "It’s a very strong headwind. We do see other platforms, such as [IFA platform] iFast, that are evolving, but the investor community doesn’t know them yet."
Foreign asset managers have – understandably – tended to take the view that Asia offers huge potential for growing their businesses given its vast population, emerging middle class, relatively low penetration of fund investment and large quantity of untapped savings. That’s not to mention its expanding pools of state wealth and pension money.
However, the low-hanging fruit – if there ever was any – has been plucked long ago, and competition is fierce from both local and global fund houses.
Certainly, the fly-in, fly-out ‘suitcase’ business model is seen as no longer feasible in Asia, with institutions and distributors expecting on-the-ground support in the region. Buying an existing fund firm to gain a local foothold is a route that some players have taken, but there is a limited number of opportunities.
Yet having a substantial regional presence is no guarantee of success. UK firm Aviva Investors cut back and restructured last year, while BNY Mellon Investment Management has significantly reduced its sales headcount in Asia this year, with both firms having previously spent heavily on ramping up resources in the region over the past few years.
Ultimately, building scale in a huge, fragmented region where many investors favour buying individual securities over funds is a big ask and can take years – just ask Franklin Templeton, Invesco or Schroders. Each has developed their business in Asia over several decades.
Online platforms are now widely touted as a development will help the funds industry expand in Asia. However, Laydon believes it will be a slow process for such models to be accepted by the investor community.
Aldcroft said regulators had to take action to accelerate the use of online platforms. “At the moment Hong Kong and Singapore do not allow online distribution [the way it’s allowed in China],” he noted. “They are way behind China, and that needs to change.”
Lieven Debruyne, Hong Kong and China CEO and Asia head of intermediary business at Schroders, is optimistic about the prospects of online distribution.
"I think it is totally doable to work with new platforms without jeopardising existing [distribution] relationships,” he added. “It has been done in many parts of the world; I don't see why it won’t be the case in Asia.” He was referring to concerns among some in the market that electronic platforms would ‘disintermediate’ traditional distributors such as banks.
In a previous interview, Debruyne had told AsianInvestor that Schroders was in talks with Alibaba’s online payment services provider, Ant Financial, about the possibility of working together in China under the Hong Kong-China mutual recognition scheme, as reported.
Meanwhile, Schroders invested $32 million in Nutmeg, a UK-based online financial advisory firm, in 2013.