US asset manager VanEck’s recent office opening in Singapore underlines its ambition to expand in Asia, but it also raises questions over how smaller exchange-traded fund (ETF) providers can attract money from regional institutions into both locally and overseas-listed products.
The $48 billion fund house is targeting institutional clients and private banks in Asia, but not retail clients, said Arian Neiron, VanEck’s Sydney-based head of Asia Pacific.
“We’re focusing on a few key markets for now: Hong Kong, Singapore and Taiwan,” he told AsianInvestor. “But we’re also planning to expand into other markets at a later stage.”
For example, the firm – which offers both smart beta and traditional index ETFs – would like to tap the huge institutional pool of money in Japan, Neiron said. “We would be keen to grow there but it’s probably not our primary focus right now.”
For now, VanEck has two staff in Singapore: Richard Siaw, who joined in June last year to help establish and oversee the branch and Asia business development, and marketing manager Corinna Tey, who came on board in September.
The fund house – whose current ETF listings in Asia comprise 17 products in Australia – did not clarify its business strategy to AsianInvestor. It is not clear whether it is focusing on promoting its overseas-listed ETFs to Asian investors, or plans to list funds in Singapore and raise money for those products – or both.
Either way, it looks to be facing a difficult task. The Asia-listed ETF market remains a small fraction of the global industry – nearly $200 billion versus $5 trillion – hampered as it is by both regulatory and structural obstacles.
“The ETF market in Asia, especially in Hong Kong and Singapore, is very tough,” Stewart Aldcroft, senior fund industry adviser at Citi in Hong Kong, said. “There is very little retail demand for ETFs [in Hong Kong and Singapore], so providers must seek institutional business to survive.
“That said, it is also clear that without a profile it is difficult to compete,” he added. “Thus you have the likes of [giant US firms] Vanguard and BlackRock with locally authorised funds that allow them to advertise and market publically, yet the majority of their sales will go to Europe- or US-listed ETFs that have the size, scale and trading volume that institutional investors demand.”
Moreover, the postponement of ETF Connect – the planned trading link between Hong Kong and China – has taken away another possible opportunity for providers to grow scale in Hong Kong, Aldcroft said. “It may come back but who knows when?”
Banning commission payments on mutual funds in certain Asia markets – as has happened in markets like Australia, the UK and the US – would boost the regional ETF industry, but there's little sign of that happening in Hong Kong or Singapore any time soon.
As a consequence, of the many new ETFs launched in Hong Kong in the past year or so, only one has exceeded $100 million in assets, and that was a money-market fund, Aldcroft pointed out, referring to solely Hong Kong-domiciled products rather than cross-listings from elsewhere.
Indeed, only four of VanEck's 17 ETFs listed in Sydney held more than $100 million in assets under management as of December 2018, although the AUM of those 17 products grew by 36% to about $1.5 billion last year.
If Van Eck were to list products in Singapore, it would likely offer asset owners lower fees on the new funds in return for them putting in a certain amount of seed capital. This is something that one Hong Kong-based insurance investment head is seeing more of in Asia, though his firm has not yet done it.
But it’s no simple task to obtain seed money for ETFs, Aldcroft said, because the willingness of asset owners to commit capital depends on whether they have similar exposure elsewhere. If so, they are less likely to bite; they tend to want to reduce the number of their fund manager relationships rather than increase it.
And while investment banks tend to be active in seeding, he added, they will only tend to do it on the basis that an ETF will quickly exceed $200 million.
GLOBAL ETF GROWTH
Still, at a global level, demand for ETFs continues its inexorable rise, driven in recent years by institutional money and the growing popularity of passive investment strategies. Much of this money is seen to be coming from Asian asset owners, such as insurance firms using ETFs to build their smart beta and overseas exposure.
Global ETF assets exceeded the $5 trillion mark for the first time in September, according to London-based research firm ETFGI. They then dipped to close out 2018 at $4.66 trillion after equity markets tumbled later in the year. But that's still only 0.6% shy of their end-2017 total.
Stock markets globally, both developed and emerging, fell by more than 13% in 2018. This shows ETF assets were supported by consistent positive inflows, Deborah Fuhr, ETFGI's founder and managing partner, said in a note last week.
Meanwhile, Asia-Pacific-listed ETF assets stood at $185 billion at end-November, up from $166 billion at end-2017, ETFGI data show, despite a 13.25% drop in the MSCI Asia Pacific Index over 2018.