Even as scale becomes increasingly important for global fund houses, Asia is being touted as fertile ground for small, home-grown investment firms – perhaps surprisingly, by executives at big international groups.

Moreover, cross-border partnerships between international and local players – whether strategic or sub-advisory – are seen as a growth area.

“Asset managers are not going to need hyper-scale to succeed in Asia,” said Paul Price, London-based global head of distribution at Morgan Stanley Investment Management.

He told AsianInvestor: “We’ve seen a lot of very successful bottom-up boutiques in Asia, and I think that will continue to be a trend, particularly in the local equity space.”

Cost of going local

Price pointed to the fragmented nature of the region as one reason why smaller local players can thrive. “That means you will see an indigenous businesses developing and growing in Asia,” he noted.

“It’s very hard for a global firm to make the decision and the investment in a local subsidiary, as the return pattern is at times unpredictable,” he explained. “The local regulations and need for local product and vehicle all become a multi-layered challenge.”

Fund houses with multiple trillions of dollars that have the resources and necessity to go both deep and wide in Asia will move first, said Price. They must build local retail and wholesale businesses and branches as well as service institutional clients in order to maintain the growth pattern they need, given typically low headline margins, he added.

There are only a few asset managers with $2 trillion-plus in AUM – including BlackRock, State Street Global Advisors and Vanguard – although that might change given the rising trend for mergers in the investment industry.

Industry observers noted that local Asian success stories often emerged from experienced investors leaving large state institutions to set up on their own. For example, Avanda Investment Management was founded in 2015 by Ng Kok Song, former CIO of Singapore’s GIC, and two of his former colleagues at the sovereign wealth fund.

Sub-advisory to "explode"

Matt Shafer, head of international distribution at Natixis Global Asset Management, agreed that demand for boutique players would continue in most Asian markets and would drive growth in sub-advisory business.

Under a sub-advisory relationship, one asset management firm runs a strategy for another. An example would be a large American fund house managing a US equity strategy on behalf of a Korean fund house, which the latter distributes to its clients.

“Sub-advisory is going to explode in Asia,” he told AsianInvestor. Such an approach makes sense for international firms that are not willing or able to develop a large on-the-ground presence.

“That might require more resources and commitment than a mid-sized player would be prepared to commit,” said Shafer. Especially in Asia, where there are numerous markets that all require different approaches and have different regulations.

Indeed, it has become tougher for foreign asset managers to retain a presence in certain countries. In recent years there have been several closures by international firms in South Korea, for instance, while Taiwan’s regulator has tightened the rules governing offshore players.

Natixis Global AM already has sub-advisory partnerships in markets such as Japan and Taiwan, said Shafer, and is reviewing other markets for opportunities in this area.

Japan, South Korea and Thailand are already big sub-advisory markets for international managers, he noted, but the trend is set to increase.

Through sub-advisory, Shafer expects to see bigger firms try to do more on their own, rather than focusing on the joint-venture or partnership approach, as they did in the past.

Partnerships to prosper?

Still, Shafer expects to see more partnerships between Asian boutiques and small and mid-sized foreign fund firms, such as that struck this month between Singapore’s APS Asset Management and Rothschild Asset Management.

Roger Bacon, Asia-Pacific head of investments at Citi Private Bank, agreed that more such tie-ups were likely among smaller fund houses.

“The cost of doing business globally in an effective way is now so high that it will be increasingly important for companies to find ways to efficiently scale their businesses, particularly in examples such as this, where there is a clear geographic symbiosis,” he told AsianInvestor by email.