Ever since JF Funds introduced the bank-distributed mutual funds model to Asia in Taiwan in the 1980s, the business has failed to realise its potential.
Don’t believe me? Consider end-2012 data, compiled by JF Funds’ successor group JP Morgan Asset Management. It shows that US households keep 27% of their assets in cash and deposits, and 67% in capital-market allocations. For emerging Asia, households keep 77% of assets in cash and deposits, and 23% in bonds and equities. In developed Asia households, there is still a 55% allocation to cash and deposits. (The survey excludes real estate.)
In an era of low interest rates and, in Asia at least, moderate inflation, that’s a loss-making proposition. Yet such is the lack of understanding and faith in mutual funds as vehicles for long-term goals such as retirement that most people prefer to destroy their wealth rather than put it into a fund.
There are plenty of reasons for this state of affairs, and these reasons have been continuous for 30 years or more. Regardless of what those reasons are, this stagnant retail demand for investment holds back the development of the region’s capital markets, and individuals’ financial security will deteriorate as demographics take their toll on traditional family support for the elderly.
For years – for as long as I’ve been covering asset management in Asia – fund managers and distributors (mainly at retail banks) have lamented this situation, which after all is bad for business. A few houses such as Franklin Templeton and Schroders do work consistently to change mindsets and incentives, but the costs and challenges have been too great.
JP Morgan AM is raising the bar in a bid to double its market share of the funds business worldwide, with Asia expected to lead that growth.
The reason behind the recent transfer of Jed Laskowitz from New York to Hong Kong as Asia-Pacific CEO is to lead an internal campaign that brings resources, people and experience to its teams in the region, and to its intermediaries.
He wants the group to push simple concepts such as diversification, long-term investing, dollar-cost averaging and the benefits of being a contrarian.
The current landscape of retail investors rushing in increasing numbers to pure fixed-income allocations, particularly around high-yield bonds, needs to give way to multi-asset or other balanced approaches. The industry needs to be cautious about promoting the benefits of income products, as he expects monthly distributions to decline as finding alpha in fixed income grows more difficult.
Laskowitz reports to New York-based George Gatch, CEO of the firm’s global funds business. Gatch’s goal is to double the firm’s market share globally in the next five years, currently about 2% (with $300 billion of AUM in a $15 trillion industry). That includes doubling the Asia funds business, now over $55 billion.
Laskowitz says this comes from investment performance, of course, but also from executing a business model that emphasises training (both internal and for intermediaries), adding people and boosting resources.
“In the US, we underinvested in training for our own teams,” Laskowitz says. “But we are going to completely revamp and train up our teams in Asia, including product development, sales and market insights.”
It’s harder to do in a multilingual, multicultural region, and Laskowitz says the firm is not imposing a US model. Asked about the IPO/churn model that bank distribution has become throughout Asia, he acknowledges that challenge, but says distributors are also reacting to investor behaviour, and that is what his firm thinks it can help to change.
He says his initial conversations with intermediaries in Asia about his intentions surprised him. “When I mentioned diversification and long-term investing, they all laughed,” he says. “But it then became apparent that distributors want to promote these things too. What they’ve lacked are the tools, the support and the partnerships to make it happen.”
JP Morgan decided it was time to double down on its investment in the region, having successfully grown its funds business in the US from almost nothing in 2004 to a sizeable and fast-growing presence today (the firm’s total AUM is $1.4 trillion).
“We began this with our market insights programme in the US in 2004 and it took us five or six years before that translated into meaningful inflows,” Laskowitz says.
With global market conditions pointing to a return to risk-on sentiment over the next five years, that bodes well for Asian capital markets. He thinks now is the time to invest heavily in education and product development.
It’s a big, expensive commitment. It will be to the benefit of the industry – and investors – if it pays off. Even more so if this effort spurs other fund houses in Asia to improve their game and work towards an investments industry that actually serves people’s needs, rather than caters to their worst impulses.