Asset managers are increasing their focus on private banks as a distribution channel due to better product margins, although most are prioritising institutional sales for higher growth prospects.
But there are simple ways for mangers to increase fund sales by working smarter with distributors, who tend to focus too much on past performance when selecting managers, according to Abhi Shroff, principal at Greenwich Associates.
He was speaking at last week’s Fund Forum Asia, where he presented the findings of a Greenwich research study of distributors and asset managers covering $500 billion in investment assets.
It found global firms focused on four markets: Taiwan, Hong Kong, Singapore and South Korea, which were the fastest growing in terms of net fund flows in 2011: Hong Kong ($5.8 billion), Singapore ($3 billion), Taiwan ($1.7 billion) and Korea ($933 million).
Shroff noted larger firms engaged with an average of 40 distributors in these markets, while five to 10 might be enough to cover distribution in South Asia, where costs are considered high relative to the opportunities (especially India).
In terms of future business, Taiwan, Hong Kong and Singapore were voted most important, followed by China and Korea. “We think that asset managers will continue to deepen their businesses in the key markets they are in,” said Shroff.
In terms of assets tracked, almost half ($233 billion) were distributed via retail banks, while private banks ($20.6 billion) lagged securities/fund platforms ($70.3 billion) and insurance firms ($55.4 billion).
Yet private banks dominated net inflows by distribution channel type in 2011 at $2.5 billion, almost twice that of retail banks ($1.3 billion). “When we look at net inflows over time, we certainly see that the private banking channel, even though it is underreported, is the fastest growing,” said Shroff.
He noted that private banks had by far the largest range of products on their platforms (average 250), making them attractive for asset managers without deep distribution coverage. But while asset managers target an average of over 200 distributors pan-Asia, most were retail banks.
“We think the private bank channel and the insurance bank channel are underpenetrated, and going forward we expect to see a lot more focus on them, with asset managers having dedicated teams, if they don’t already," Shroff added. "We think that focus will continue to grow.”
The research also showed that by asset class, supply side and demand side are well aligned. In fixed income, global and emerging market bonds are marketed by the most managers, while domestic and global bonds (as well as EM bonds) are the best-selling, say distributors. Global and EM bonds are expected to see strongest demand over the next year, with US bonds to decline.
Similarly, managers cited domestic, EM, Asian and China equities as their top-selling equity products, while distributors say domestic, China and Asia ex-Japan equities were among the best-selling. EM, Asia ex-Japan and China equities are expected to see most demand in the next year.
Yet while alternatives are on most global asset managers' platforms, few are considered top-selling. “Commodities is the only [alternative] asset class we see managers being successful selling across Asia,” noted Shroff.
In intermediary business, retail banks are extremely selective when choosing asset managers, picking those with recognised brands. On average the study found they had an average of 20 fund providers on their platform. “Banks do not want the headache of having a fairly large selection list,” said Shroff.
However, because of their global network private banks tend to have a far wider range of managers, with brand recognition less of an issue.
But Shroff noted that when distribution gatekeepers were asked why they put funds on their platform, past performance was the most popular answer, with expected outperformance well down the list of priorities, and favourable fee retrocession even further down.
“We think they are choosing funds for the wrong reasons,” said Shroff. “If you looked at this from an institutional perspective, that would be reversed because they typically want to know how managers will add value.
“But this is partly the fault of asset managers because in Asia we do not see them doing a great job in explaining or selling their investment capabilities to distributors.
“What we would like to see is confidence in asset managers’ capabilities and understanding of their philosophies moving up as gatekeepers get a better understanding of managers.”
In terms of sales success after a product is accepted on a platform, fewer than 20 funds typically make up 80% of sales, the study found.
When distributors were asked what managers could do to help sales be successful, the top answer was timely response on market changes, followed by adviser training and past performance.
“Most managers we talk to don’t do well in terms of timely response to market changes,” explained Shroff. “Often it takes a manager two or three days to get back to a distributor when there is a critical event. Distributors want a same-day response. That is something asset managers could easily work on and really make a difference.”
In terms of marketing tools, distributors listed insightful market reviews, timely response on market changes and marketing materials for end-clients as most important. Educational events, co-branded ad campaigns, dedicated websites and conference sponsorships came down the list.
But Shroff also pointed out that intermediary business made up less than 5% in terms of total AUM for large global managers in 2011, half that of institutional business in some cases.
“Managers are leaning towards institutional business, which is more stable with less turnover,” added Shroff. “From a resourcing perspective you can cover the largest 20 to 30 institutional clients in the region with relatively few people. Institutional fees are lower, but you can still have high margins because the costs are lower."
But on the retail side, the study found a strong link between business size and the depth of relationship. “In the intermediary business, we find scale is much more important,” added Shroff.
Few asset managers were found to have a pan-Asia focus. Franklin Templeton, Schroders and BlackRock received the most mentions from Asia ex-Japan gatekeepers. They were followed by BNP Paribas, Allianz Global Investors, Fidelity and JP Morgan AM.