Deutsche ponders regional retail funds strategy

How to crack Asian retail mutual fund markets in a methodical, regional way?

Although Deutsche Asset Management is a large player in the Asian fund management industry, sourcing about $8 billion from Asia ex-Japan, it is not yet in the top-10 among global houses. DeAM is known as an institutional player, and only about 10% of its regional assets are derived from retail investors. To enter the highest echelon of fund managers, therefore, it is thinking about how to make itself a retail as well as an institutional power.

Sam Hanbury, head of sales and marketing, has been tasked with building such a strategy. He was based in Singapore until about six months ago, when he moved to Hong Kong, to be closer to the firm's North Asian clients and prospects. Still reporting to Asia CEO Choy Peng-Wah in Singapore, Hanbury is overseeing a part of what used to be Tokyo-based Tony Lally's Asia-Pacific retail operation. (Lally has recently retired.)

Although the firm has been approached about potential deals to expand in Southeast Asia, its focus is on six markets. It is moving aggressively in Korea and India, both of which are relatively untouched by global competitors and offer potentially large client bases. Its second priority is to figure out how to penetrate the mature and crowded hubs of Hong Kong and Singapore. And third, it needs to figure out how to approach Taiwan and China.

"The key is to create a product that is scalable," Hanbury says. "Ideally we would like one fund that can be sold in multiple markets." The firm is now leveraging its global expertise to come up with a killer product. For example, it is looking at how global overlay teams (say for currency) can create structures on top of cash, equity or bond funds. The result is unlikely to be a vanilla asset class, partly because competitors already saturate markets with those, and because parent Deutsche Bank is known for complex engineering.

So far its onshore retail activities have been straightforward, however. The firm launched its first domestic India bond fund in January. The India business, managed by Sandeep Gasgupta, now has Eur450 million of business.

A few weeks ago DeAM also launched its first Korean fund, a long-term (more than one year) bond fund with a corporate bias, and that has raised around W10 billion ($8.6 million) so far. In December it will launch a Korean equities fund, which is a necessary complement to the stable even though domestic demand for stocks is minimal. Early next year it will roll out a short-term bond fund. Shin Yong-il is DeAM's Korea CEO.

"The issue in Korea is getting over W1 trillion of assets," Hanbury says. "Then government funds and agencies will deal with you." He acknowledges that this is a tall order, given the Korean funds market has shrunk by 6% this year.

The problem in Korea, and to an extent elsewhere, is that domestic investors often are not interested in the kind of products that DeAM specializes in. Very few investors want offshore product, which is seen as too risky. "The whole skill of retail is selling funds that people want," Hanbury says.

Hong Kong and Singapore are even trickier. From on high, the two markets boast welcoming regulatory frameworks and wealthy populations. But they are also small populations inundated with a full range of fund products. Over time, Hanbury predicts the Mandatory Provident Fund market will move to open architecture, but until then, the incumbents have it sewn up. The top MPF players have also got a leg-up in the ORSO pension business; Singapore's cash market is also crowded. A new entrant needs a hot product.

DeAM doesn't have a presence on the ground in Taiwan, making it hard to penetrate Asia ex-Japan's biggest retail market. Hanbury says the firm is working on a product to roll out early next year, but he can't reveal details yet. For now the relationship with distributors is handled by travelling from Hong Kong. DeAM may begin a business there in 2004 but it will be very gradual, barring an M&A deal that vaults them inside.

That leaves China, a wild card for DeAM as much as it is for anyone. The firm had a technical cooperation agreement with Dacheng Fund Management in Beijing but, like many of such arrangements, it faded away. Hanbury says DeAM is still exploring joint venture opportunities, but isn't in a hurry. He says the first-mover advantage may be spurious, noting that large American firms entered Europe a century after it had developed a funds market, and excelled.