Europe is slipping off the radar screen for many in the asset management business in Asia, as evidenced by a survey of industry executives conducted by AsianInvestor and Clifford Chance.
Asia-based professionals report little interest in Europe as a place to raise capital, as a destination for Asian asset allocation or even as a domicile for new products.
The survey received 160 responses primarily from regionally located business and sales executives among asset management firms, as well as from some asset owners and distributors of investment products.
We asked which three geographies should receive the most capital from global investors. The view from Asia is that hardly any will go to continental Europe, which received 9% of votes, down from 20% putting Europe in their top-three destinations when we did this survey a year ago.
That puts expectations for Europe below India, Africa, Australia and most other regions. The UK was a standalone category and received 5% of votes.
In contrast, 40% of respondents put North America among their top-three destinations of global capital, while Asia ex-Japan and China/Hong Kong topped the charts.
The survey asked in which jurisdiction the most capital will be raised, with the US, emerging Asia, China and Hong Kong taking the lion’s share of votes. Only 9% cited Europe.
Matt Feldmann, partner at Clifford Chance, muses that this is partly a result of the Alternative Investment Funds Management Directive (AIFMD), which comes into effect next year but has already made it difficult for hedge funds and private equity firms in Asia to raise assets from European investors.
“That, and with liquidity issues in Europe, many managers seem to think that Europe is not worth the bother,” he says.
We asked what asset classes Asian institutional investors will invest the most in over the next 12 months. These are mainly global in nature, so sectors such as global emerging market debt and investment grade credit fared well.
Where regions do fit in, however, Europe fares poorly. Asia ex-Japan equities garnered 33% of votes (in which respondents selected three answers), US equities attracted 22% and emerging-market categories fared well (34% to emerging-market debt, 29% to emerging-market equities). But Europe/UK equities were a top-three choice for only 4% of respondents; only Japan fared worse (3%).
We asked what regulatory changes across the globe will most likely impact the investment-management industry in Asia. Here again, AIFMD barely registered, with only 6% selecting this as the most important one.
“It shows people don’t expect to raise assets from Europe anymore, so it’s fallen off their radar screen,” says Feldmann.
In contrast, America’s Fatca rule and pursuit of tax evasion is clearly on people’s minds, as this won 28% of the votes. Basel III and Solvency 2 came in second with 21% of votes, so to that extent European regulation is still shaping the industry. The Volcker Rule came third with 14%.
"The heavy penalties [30% withholding] for Fatca have serious implications for a lot of funds, particularly the smaller ones, so it's not surprising that funds find it a top worry,” says Mark Shipman, partner and head of global investment management sector at Clifford Chance.
Europe’s irrelevance to the Asia-based industry showed up in other ways. We asked people to rate the impact on their business from US and European regulatory trends. Although 29% rated this as "adverse", the most, 39%, said there would be "no significant impact".
However, when asked how firms would respond, there were virtually no votes either for moving onshore to Europe, or outside of Europe. It doesn’t seem to matter. And a very small number (5%) said they would restructure some of their funds to Ucits.
On the other hand, 7% of respondents said they would redeem/stop taking money from US investors.
“For 7% of respondents to refuse money from the US is remarkable, given the significance of that market to fundraising,” Shipman says. This suggests US regulation is having a negative impact on some businesses in Asia. But it also shows that Europe isn’t a factor one way or the other.
Finally, we asked where new investment products authorised to sell in Asia will be domiciled. The response is difficult to compare with last year’s result, but suggests lacklustre support for Ucits.
Last year the question was positioned as "locally in Asian markets" versus anywhere else, with 45% voting for Asia and 55% somewhere else.
This year we received the same vote for local Asian domiciles, 45%, but the other category was split between "onshore Europe/Ucits" and "Cayman Islands/other offshore". In the event, Europe/Ucits came in third, with 26%, versus 29% for the Caymans.
“Although it’s hard to compare with last year, the vote for Ucits was not as big as I’d expected,” Feldmann says. “In fact, I’d say 26% is surprisingly low.” He speculates the use of derivatives by way of Ucits has also made these funds harder to authorise in Asian jurisdictions.
The full results of the survey appear in the July edition of AsianInvestor magazine.