Asset managers looking to set up or increase their foothold in Asia should be more aware of the challenges involved, says Connecticut-based consulting firm Greenwich Associates, in a March/April survey of 16 global firms that manage $260 billion of Asian assets.
Singapore-based Greenwich consultant Abhi Shroff presented the findings at the AsianInvestor and FinanceAsia Asia-Pacific Debt Forum in Hong Kong on Tuesday.
To start with, a far smaller proportion of assets are externally managed in Asia than in Europe or the US. At the end of last year, Asian institutions managed some $5 trillion in assets, not far short of the $6 trillion in the US. But while 80% of US assets and 47% of European assets are outsourced, that figure drops to 12% for Asian assets -- an available asset base of $800 billion.
For example, Chinese institutions outsource only $205 billion of their $2.85 trillion in assets to external managers. The same is true in South Korea where $115 billion is outsourced from a total of $678 billion, and in Singapore where $84 billion is outsourced from $447 billion. Admittedly, third-party management is more prevalent in Hong Kong, where $116 billion of the total of $225 billion is outsourced -- but the former British colony is one of the smaller markets in the region.
What's more, in the long run, Asian institutions plan to place an even greater emphasis on internal management, as another recent Greenwich study found.
Another issue is Asia's sheer scale and diversity. True, there are concentrations of assets in core markets such as Hong Kong and Singapore, but Asia's large institutions are spread across a huge region in countries with different languages, financial systems and regulatory frameworks. That makes it very hard and expensive to cover.
Thirdly, many Asian institutions are young and staffed with relatively financially inexperienced staff and they tend not to use investment consultants to assess managers or markets. That means there's an "almost retail-like focus on recent investment and performance that makes client service and retention a challenge", says the report, something Greenwich explored in a report in October.
These limited prospects and operational challenges often result in a "disconnect" between management views in the headquarters of a global asset manager and that of staff on the ground in Asia, says Shroff.
Other difficulties cited by respondents included cost pressures as Asian investors are particularly fee-conscious; lack of sophistication on the part of institutional investors; and the difficulty of recruiting front-office and management talent.
In terms of institutional business opportunities, China is viewed as by far the most important market, ahead of South Korea and Taiwan (see graph). One common method of gaining access to Chinese institutions is to set up a joint venture with a Chinese partner; seven of the 16 respondent firms have established JVs in Asia, and six of them are in China.
Turning to specific asset classes, regional demand is currently strongest for global fixed-income strategies, followed by emerging-market bonds, according to the survey. In line with that, asset managers are more likely to be launching fixed-income products than other types of strategy in the coming months. Ten of 15 respondents say they will launch a fixed-income product, compared to seven launching an equity product, the next most popular choice.