JP Morgan AM’s Asia chief on China, ETFs and M&A

The investment industry will remain fragmented despite the trend for more mergers, and Beijing is not motivated to lead an Asia funds passport, argues Michael Falcon.
JP Morgan AM’s Asia chief on China, ETFs and M&A

The current trend is for ever larger mergers of asset management firms, but the industry is likely to stay fragmented. Separately, China does not have ambitions to build a pan-Asian funds passport, as some have mooted could happen.

These were views voiced by JP Morgan Asset Management’s Asia-Pacific chief executive during a discussion with AsianInvestor last month. Michael Falcon also pointed to the firm’s desire to expand its nascent exchange-traded funds business by listing products in Asia.

In the past year Aberdeen Asset Management has merged with Standard Life, Amundi with Pioneer Investments and Janus Capital with Henderson Global Investors. And now both BNP Paribas Asset Management and Natixis Global Asset Management have been named as contenders for a possible combination with rival French firm Axa Investment Managers.

Yet while Falcon acknowledged the trend for consolidation, he argued that the financial services sector in general—and asset and wealth management in particular—was very fragmented in most markets globally and likely to remain so. 

Michael Falcon

“Whereas in consumer products you may have market leaders with 35% to 40% market share, in asset management no one has double-digit market share globally,” he said.

Even BlackRock, the world’s biggest fund house with $5.7 trillion in AUM as of June 30, accounted for just 6.7% of the global industry’s $84.9 trillion as of end-2016 by PwC data.

“There could be decades of consolidation activity and opportunities would remain for smaller players,” Falcon argued, echoing similar comments made by Paul Price, global head of distribution at Morgan Stanley Investment Management.

Scale is important for both institutional and retail distribution, noted Falcon, but it doesn’t eliminate the need for boutiques and niche players.

Asked whether JP Morgan AM would consider acquisitions in Asia, he did not rule out the possibility, but said: “Our strategic focus remains on organic growth.”

China to lead Asia passport?

Of course, the particularly fragmented nature of the funds market in Asia is one reason it is proving so difficult to develop an investment product passport like Europe’s Ucits structure.

Falcon sees this as something that could take decades.

“It took 30 years to get Ucits done, even though there was the underlying framework of the European common market and EU (European Union),” he noted. “Asia doesn’t have that underlying infrastructure.”

“The likelihood of significant passporting ability—other than a series of bilateral arrangements modelled after mutual recognition—within the next five to 10 years is relatively low.”

So could the China-Hong Kong mutual recognition scheme supersede other initiatives, such as the Asia Region Funds Passport? In theory yes, said Falcon, but he does not feel China is motivated to lead such an initiative.

Beijing’s incentive for developing the mutual recognition of funds (MRF) with Hong Kong is to build up its domestic asset management market by bringing in global and regional products at a controllable rate, he noted Falcon.

“I don’t think China has an ambition to build a regional passport without their asset management business being world-class and globally competitive.”

And it will take time for Chinese fund managers to build capabilities, experience, credibility, operations and client bases overseas, added Falcon—something they are only just starting to do. 

Passive investment push

Meanwhile, JP Morgan AM is among the leading foreign fund houses in China, and building out in the mainland is a big focus in Asia, as is the development of its passive business. This reflects recent moves by other traditionally active players, such as Fidelity and Franklin Templeton, to enter this area.

“ETFs (exchange-traded funds) and the global expansion of our beta strategies business is a strategic priority,” said Falcon, as it looks to build strategic and alternative beta and ETF capabilities.

The plan is ultimately to launch ETFs in Asia, he noted. “You’ll see expansion throughout EMEA, and eventually you’ll see it in Asia Pacific as part of a multi-year expansion initiative.” He would not be more specific on when that might happen.

JP Morgan AM—which launched its first ETF in the US in June 2014—last month unveiled the first two products it will list in Europe: one a long/short Ucits equity fund and the other a managed futures Ucits ETF.

The firm’s focus is on actively managed ETFs rather than traditional index strategies. “We will continue to seek to differentiate ourselves in systematic, strategic beta, multi-factor products,” said Falcon.

To provide the latest insights on Asia's ETF landscape, AsianInvestor is co-hosting a forum, Inside ETFs Asia, at the Grand Hyatt in Hong Kong on November 8-9. For further details, visit the website or contact Terry Rayner via email or on +852 3175 1963.

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