Western asset managers often fail to achieve a profitable business in Asia because they spread themselves too thinly, says Daniel Celeghin, head of wealth management strategy for Asia-Pacific at consultancy Casey Quirk. A more measured, targeted regional strategy is called for.
By attempting too many initiatives – such as fund launches, institutional business and private banking distribution – across several markets, fund houses make their businesses very costly to maintain, noted Celeghin.
“Nowadays, [institutional] buyers are too smart and they have too many choices,” he said. “Fund managers should take a few things that they are really good at and focus on the resources [for those] in terms of products and markets.”
Celeghin was speaking to AsianInvestor following the release of a report on Wednesday outlining how investment managers globally must adapt to survive. Increasingly tough market conditions have resulted in casualties in Asia, with Edmond de Rothschild's exit from Hong Kong just the latest example of a rising trend of closures, consolidation and staff cuts.
Indeed, asset managers globally must better allocate resources in the face of rising costs and shrinking business as institutional investors seek to reduce the fees they pay and insource more portfolio management, noted the report. That means focusing more keenly on a target segment rather than following a diversified model in the region, said Casey Quirk in the report 'Survival of the Fittest'.
Threats to address
Ultimately asset management business will be a lot harder to come by in the coming five years, noted the New York-based consultancy. It predicts that the global fund industry (excluding China) will post global annual AUM growth of less than 1% from 2016 to 2021 and annual revenue growth will fall to 2.9% over the same period, from 6% between 2012 and 2015.
Asia may appear a bright spot to many firms, as fund industry revenue growth, excluding China, will be 7.9% between 2015 and 2021, estimated Casey Quirk.
Yet asset managers in the region face problems similar to those of their peers elsewhere, and even greater issues in the form of market fragmentation and a consequent need for localisation.
While the Asian institutional asset pool is growing fast, fund managers are finding it more difficult in access thanks both to greater competition and the trend towards insourcing.
For instance, some big life insurers in the region are not keen to outsource, said Celeghin. “The situation is different among market and type of investors, but most of them will tell you their long-term plan is to keep [more] investments internally.”
Moreover, Asian institutions are increasingly consolidating external mandates, putting pressure on managers’ investment fees, according to Boston-based research firm Cerulli Associates.
What's more, there is the growing threat to active managers from passive strategies.
Passive investing has not yet taken off in Asia to the extent that it has in Europe and the US, noted Celeghin, but it is gaining traction. Asian institutions, led by Japanese investors, have started to add ETF exposure, though the retail segment has been very slow to do the same.
On a brighter note for asset managers, flows are rising from individual investors. A notable example is China, where the mutual fund industry assets – which are dominated by retail investors – has expanded 142% to Rmb8.7 trillion ($1.3 trillion) since the end of 2012.
Overall, Casey Quirk predicts that Asia (excluding China) revenue from the retail segment will achieve a compound annual growth rate (CAGR) of 10% from 2015 to 2021, compared to 6% from institutional clients.
If China is included, retail revenue CAGR in the region will be 18% over the same period, against 12% from institutional clients. The emergence of China and rising contribution of individual investors indicates that global players need to localise their businesses in Asia, rather than relying on partners such as joint ventures.
“A lot of foreign groups want to scale up but not add costs,” said Celeghin. They are aiming to sell existing products to a new market, he noted, but that is unlikely to work in China.
While the mainland is still a semi-closed market, Celeghin argued, it is similar to the US, where both retail and institutional investors have a strong home bias, creating a cultural barrier for foreign managers.
Hence local platforms and locally domiciled funds are becoming more important in Asia, but they are expensive to put in place, he noted, hence fund companies will need to map out their expansion plans more carefully in the region.