Fund Managers : what to expect in Asia?

As Asia is growing fast and unveiling an unprecedented amount of wealth accumulation, fund managers are more and more looking at the region with the sake of “cracking the market” and making a place on the eastside. When this actually makes sense, there are however many aspects that should be considered.

Location

Hong Kong remains an important financial centre but Singapore definitely took the lead in terms of Asset Management hub. The Lion City implemented a serie of incentives that definitely provides an attractive tax and legal environement for any asset manager willing to set up in the City (see my last article – february 2015). The main advantage to confer to Singapore also relates to its geographical proximity with some of the most active and growing pools of wealth in South East Asia (Indonesia, Philippines, Malaysia).

Regulatory

Following the aftermath of the 2008 financial crisis, major financial centres undertook an array of policies in order to protect retail investors from investment sollicitations.

Singapore

  • When domiciled in another country, an investment fund can be marketed freely to institutionals (large banks, insurance groups) and does not require any previous registration.
  • As per accredited investors, regulation has been updated in 2014 and requires fund managers to register the fund under the “restricted scheme” through the MAS online portal.

Hong Kong

Investment funds domiciled offshore and aimed at being offered to institutionals or accredited investors do not require previous authorization or registration. Documentary proof of the “accredited status” of the investor has however to be provided (financial statements).

When these conditions do not really impede the distribution of funds in Asia, additional tightening can be expected. Indeed, the Hong Kong securities and Futures Commission (SFC) informally mentioned last year that they might gradually adopt more restrictive interpretations with regards to funds distribution and treat marketing to professional investors as marketing to the public.

All in all, the accrued restrictions surrounding the distribution of funds in Asia officially aim at protecting investors but informally at encouraging the set up of fund managers locally. Over the next 5 years if not earlier, boutique fund managers will have to consider the setup of a local representation or local partnership if interested to further develop in the region.

Time concept : In Asia, time has no limit ..

Knowing your market is essential when you intend to tap into it. This encompasses not only product suitability but also mindset undertanding. Marketing funds in Asia can take a very long time and therefore patience is key. As for any product, investors will first take time to hear about the product, then recognize the brand and finally try out the products if convinced that the momentum is here and attractive yield is almost guaranteed.

On the contrary, once the decision is taken, the investment horizon is very short. A risk of sudden outflow should therefore be well considered by the Portfolio Manager.

Geographic horizon

The first generation of Asians built up their wealth mainly throuh own businesses and property investment . This is mainly due to cultural mindset but also restrictions against investing overseas. With the globalisation and gradual opening of capital markets, asians started to invest abroad but still, remain largely focused on Asia. The reason is simple: they know the region (geographically close) and it provides very attractive investment returns. Investors are starting to invest abroad in a portfolio diversification approach but again, time and investment education are key.

Risk exposure awareness and investment horizon

Asians are reputed gamblers and rather prefer to trade bonds, stocks or derivatives by themselves instead of trusting a professional portfolio manager. However, market volatility and increased wealth preservation awareness has provided for a gradual shift towards professionally managed portfolio. Change is on its way but investment funds penetration in Asia still remains low compared to western peers.

All in all, Asia is a tremendous market for the asset management industry. Capital markets are gradually opening and providing asset managers with an extraordinary potential of development. When deciding to market funds in Asia, it is important to keep in mind three important factors: time, performance and branding : marketing is what the fund manager does while branding is what the fund manager is. Slight difference but important one especially in Asia where your branding identification is key.

 

EMERGING MARKETS: A WORLD OF OPPORTUNITIES

Positively or negatively impacted by current market trends, emerging markets remain high on investors watch-list: ignoring this segment would mean ignoring a powerful demographic and economic engine. According to IMF’s 2014 World Economic Outlook, emerging markets make up more than 50% of global GDP and this share is about to grow at an even faster pace over the next decade.

The wheel is turning fast though and sentiment towards emerging markets can change as fast as an eye blink. Once “super stars” , some emerging markets are now out of the watchlist pending for sunny skies.

Bad vintage for those who’ve been temporary shelved but skies will definitely clear out over the long run, provided that structural reforms are carried on.

2015 worst vintages

Latin America

Major exporter of commodities, Latin America’s outlook has been significantly hampered by commodities price slump and China’s economic slowdown. As bad news never comes alone, Brazil’s corruption scandals have thrown even more shade over the continent growth prospects.

While the situation is clearly unfavorable, the continent growth prospects shouldn’t be undermined. Most of Latam countries undertook speficic structural reforms that place them in a better shape to sustain external shocks. Second largest economy in Latin America, Mexico is a large oil exporter but also a manufacturing hub, exporting most of its goods primarily towards the US. This will definitely position Mexico as a top winner once US economic rebound is confirmed.

Brazil on its side has had to face the consequences of China’s economic slowdow. More importantly though, Brazil needs to seriously tackle political issues and undertake structural reforms that have been postponed for too long during the commodities boom years. Chile, Peru, Colombia are also experiencing the “commodities pain” but fundamentals remain strong.

All in all, Latin America is experiencing a “spring cleaning” and should be back to the front stage once the horizon’s lightens.

Africa

More Frontier than emerging market if we exclude South Africa, the continent has been attracting an ever growing amount of foreign investments over the last decade. Still very unstable and impacted with serious security issues, yet the continent keeps attracting adventurous investors. If the horizon is much more volatile, long-term prospects are nevertheless positive and will be supported by a gradual diversification of GDP revenues and reduced reliance on commodities export. Among the top performers of the continent (South Africa, Nigeria, Ethiopia, Kenya, etc.), economic growth has been supported by massive investments in infrastructure and services sector.

2015 best vintages..

Asia

Winner of 2015, the general sentiment towards Asia is particulary positive and should remain as such thanks to the combination of three factors: lower commodities prices, monetary policy easing and low interest rates.

Favorite among the favorites, India’s economic outlook is particularly positive and supported by a high level of confidence in Modi’s reforms potential. The slump in crude prices sent confidence levels to their highest levels as it will definitely benefit the country, heavy oil consumer.

Within South East Asia, investors radars are all turned towards Indonesia, Philippines and Myanmar expected to report strong growth rates for 2015.

Ex favorite, China remains Asia’s largest economy but has to face a serious economic slowdown and risks of acccelerated deflation. In the same vein than Brazil (which, in contrary, is experiencing high inflation), China is turning the page of an investments drived economy and needs to implement proper reforms in order to support domestic consumption.

All in all, emerging markets offer unprecedented growth potential and there’s no reason to “leave the ballroom”. Long term potential has however to be balanced against short-term wobbles as winds can quickly overturn. To benefit the most from emerging markets growth potential, better take a step back and look for little gems yet unknown or underestimated by the crowd.