Asset Managers – adapt to Asian markets taste

According to AT Kearney, 23% of AUM in Asia (USD4.4 trillion) were managed from western asset managers by December 2014. While the West keeps dominating the global investment funds industry, the current redraw of global wealth to the Far East is shifting likewise the asset management centres and distribution schemes .

Many are gathering at the gate with the hope of cracking the market with the same tools and products they distribute on their own domestic market..but is it stil workable?

Forget a “take it or leave it” strategy and adapt your offer

Penetrating the Asian market without local support or partnership when you are still a boutique sized Asset Manager can be very enduring and time consuming. Don’t get it wrong: superior investment performance won’t guarantee you an easier market penetration. Competition is fierce and you’ll need to adapt to local market “taste” as it can be radically different from a EU or US perspective.

A rising local asset management industry eager to similarly tap into global markets..

Asia’s moving fast and is definitely ready to play in the big arena, ie. developing its own asset management industry and UCITs like funds label.

Asian fund houses are soaring in China and so are they in Singapore: according to MAS latest datas, total Assets managed by local asset managers in Singapore soared 30% in 2014 and 38 new licenses were granted to local fund managers.

According to the above, boutique asset managers without local representative office should consider alternative ways of distribution: partnership with local institutions and/or white labelling strategies with local larger players provided that products are adapted to local expectations.

Soon to be, the pan-asian distribution scheme will definitely ease distribution of locally branded funds..

Alhough still immature and fragmented, the Asian continent is on track to build up a multilateral investment funds framework capable of facilitating the distribution of funds throughout the regions. According to a recent report from AT Kearney, about USD600bn of assets (11% of the Asian mutual fund market) could be managed under such framework by 2030.

So far, the framework is totally fragmented with several projects having come alive over the last months: the Asean CSI (Singapore, Malaysia, Thailand) on one side and the Hong Kong–China scheme on the other’s. The APEC region Fund passport, expected to gather 6 countries (Singapore, Australia, Korea, New Zealand, Philippines, Thailand) is the third scheme planned to be launched in 2016.

Although some regulatory and geopolitical constraints remain, the three schemes should merge at some point, providing the region with a tremendous funds distribution channel including two of the largest markets: China and Australia.

With a UCITs like framework, don’t expect asian asset managers to limit their business appetite to Asia: they are already looking at tapping into other emerging pools of wealth (Latin America and Africa) and eager to get a foot on developed markets. As a matter of fact, western or emerging markets boutique asset managers have a card to play through strategic partnerships that will provide both parties with a profitable “give and take”.

 Forget about old school schemes

Funds distribution channels are experimenting an accelerated shift from banks to online distribution. Nothing new but datas are worth noting. According to Cerulli, bank’s market share fell from 63.3% in 2012 to 48% by end of 2014. In the meantime, direct fund sales increased and represented 16.2% by end of last year. Although global, the phenomenon is mostly pulled ahead by Asia where e-platforms and robo-advice are gaining ground very fast. This doesn’t mean the end of an industry but an industry’s necessary restructuration…technologically driven.

What to keep in mind before attempting to penetrate the Asian market?

  • Superior investment performance won’t make it easier to distribute your funds in Asia;
  • Work on your branding as Asian’s consumption instinct is definitely led by fashion flair;
  • Be present on social medias, graal for a larger audience recognition;
  • Adapt your products to local “taste” – fees, products features should be in line with local market, not the reverse;
  • Work with a local representative and / or develop partnerships.
  • And finally cultivate your patience..valuable asset when working in Asia..

Fund managers: What makes you unique?

As the markets keep extremely volatile, fund managers are working very hard to deliver attractive investment pitch to get a foot into the Asian market.

However, as most may have already experienced, penetrating the asian market can take time: working your branding and providing for short-term attractive return are the minimum basics but having this “something different” is what bank’s distribution teams in Asia are looking for.

A recent interview of Paul Stefansson, head of Asia Pacific UBS Wealth Management in the Asian Investor magazine gives an insight at what are the bank’s key selection criterias:

  • Min track record of 3 years – Although the UBS interview mentions a minimum 3 years track record, its is a very minimum one and acceptable if the fund combines altogether exceptional return over the last 3 years and a serie of attractive features (size, liquidity). A min 5 years track record sounds more realistic especially for fund managers new to the market.
  • Concentration and liquidity risk: this is even more critical in Asia as local investors tend to invest on short-term horizon and therefore need to guarantee an exit door. Minimum size is usually USD 100M AUM but USD50-70M could be considered if liquidity and stability of the core investment is guaranteed (own Fund manager’s investments for example).
  • What are investors demanding now: yield..yield…Yield. This is even more true in Asia and in a current context of zero if not negative yielding. Banks focus on equities, hedge funds but also more and more on alternative strategies which can potentially provide higher returns thanks to the illiquidity premium. Albeit gaining ground, alternatives strategies are still a “micro niche” in Asia though. This is due to the longer-term commitment that such funds involve, creating therefore a discrepancy with investors short-term preference. However, the low yielding context is undoubtedly creating a change in investor’s mindset and the market should gradually gain more sophistication.
  • Branding: Heads of distribution receive so many sollicitations that any “added feature” will make a fund manager shine among the crowd. Besides being in the top performance range, a fund manager has to get something “different” : niche market strategy, specific expertise / unique process. All Fund Managers can pretend to be the best in their categories but with many pretending it, let’s rather focus on your “inner difference or special story”.

 

 

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.

 

Rolling out the red carpet to Fund Managers in Singapore

Although Singapore High Net Worth individuals (HNWIs) and related wealth are respectively 18% and 238% less than in Hong Kong (Wealth Insight), the singapore asset management industry keeps growing and is expected to become the most important wealth management centre in Asia. While there is not such a big difference between these two financial hubs, let’s have a look at what makes Singapore such an attractive place for wealth owners and managers.

Attractive tax exemption schemes

Singapore tax system offers tax income exemption to both offshore and onshore funds managed by Singapore based fund managers.

  • To benefit, offshore funds must not to be resident in Singapore and not owned 100% by Singapore tax residents.
  • Restrictions also apply as per the percentage of Singapore resident investors in the fund: for both schemes, a financial penalty can be applied above a certain percentage (30%).

In addition to the offshore and Singapore resident schemes, the enhanced tier fund scheme was introduced in order to provide fund managers with similar tax exemption but greater flexibility: no restriction on the percentage of Singapore investors in the fund and fewer restrictions over the choice of fund’s residence. The latter requires however previous approval from the MAS and specific conditions such as a minimum fund size of USD50M.

And additional features that definitely make Singapore an attractive fund’s domicile..

While the offshore and enhanced tier fund schemes can still appeal to fund managers willing to domicile funds in other jurisdictions, specific  features definitely provide additional incentive to set up funds in the Singapore:

  • Access to Singapore large tax treaty network (over 70 countries), allowing funds to benefit from attractive tax rebates when investing in different parts of the world.
  • Dividend payments from a Singapore based fund are tax-exempt.
  • Fund management incentive providing a concessionary tax rate of 10% for fund management and investment advisory activities subject to certain conditions (such as a minimum USD250M Assets under Management);
  • Singapore’s robust legal system and recent inauguration of the SICC (Singapore International Commercial Court) provides additional comfort to wealth owners and position Singapore as an international dispute hub.

Rising pool of emerging wealth in Asia ….and elesewhere

According to Credit Suisse 2014 Wealth Report, the US and UE remained the wealthiest regions in the world in 2014 (USD91trillion and USD85trillion respectively as of 2014). Asia Pacific is however gaining ground very quickly reaching a confortable 3rd rank (USD75trillion including China and India). Most forecasts actually estimate that Asia will have closed the gap or even overtaken the US over the next decade if not earlier.

Less well-known, Sub-saharian Africa is gradually building up, revealing an increasing amount of wealth, without mentioning emerging european countries and Latin America.

Singapore global ambitions

All in all, Singapore has been building a convenient and attractive framework that will definitely support the even growing need for wealth management advisory in South East Asia. But Singapore’s attractiveness as asset management hub shouldn’t be limited to South East Asia as the tax and legal environment provided by the city could also appeal to wealthy individuals from emerging Europe, Middle East and Africa. As a matter of fact, Taurus Wealth Advisors, a Singapore based multi-family office recently applied for a license to operate in the Middle-East with the ambit of gaining access to African clients. A sign among others that the City’s limited territory doesn’t match with its unlimited potential and ambitions ..

Sources: Wong Partnerhip -Wealth Insight – BCG – PWC- Credit Suisse Global Wealth

OFFSHORE FUNDS DISTRIBUTION IN ASIA: TOWARDS TIGHTENING RESTRICTIONS

Asia has definitely become a Promised Land for many funds managers, looking to tap into an impressive but still immature pool of wealth. The message has been positively received on the East side with countries gradually opening up to global markets. But does this openness necessary match with easygoing business? Whereas some aspects are clearly aimed at offering an easy and integrated framework to develop business, constraints are also emerging.

OPPORTUNITIES

 Hong Kong Stock Connect

Inaugurated on November 17, 2014, the initiative was well acclaimed by the international investment sector. Following with the success of RQFII and DQFII programs, the Connect scheme provides additional flexibility and potential to dig into Mainland China’s market. The relative success of the launch should however be considered carefully as current investment restrictions may induce a potential slow down in activity. Notwithstanding the latter, the scheme presents huge potential and will definitely help to strengthen China’s capital markets positioning and RMB internationalisation.

ASEAN Fund passport

In September 2014, financial regulators from Singapore, Malaysia and Thailand launched the ASEAN Collective Investment Scheme (CIS) Framework. The framework allows the units of an ASEAN CIS authorized in its home jurisdiction to be offered in the other host ASEAN jurisdiction, provided that the CIS satisfies a set of specified standards. This cross-border distribution platform  represents a huge potential for fund managers willing to tackle regional but less structured markets such as Malaysia and Thailand. Very positive and promising, this scheme requires though registering funds in one of the participating country. Singapore is therefore aimed at becoming a place of choice for fund managers willing to develop in South East Asia.

AEC – ASEAN Economic Region

With 10 participating countries, the much-anticipated ASEAN Economic Community is an ambitious project that, if brought to life will represent a significant growth potential for the region. Aimed at creating a full regional economic integration, the project is still under discussion and expected to be launched by end of 2015. Despite the skepticism surrounding the project’s feasibility in due date, one must acknowledge that there is an actual willingness of building up a regional framework. While it took about half a century to Europe, one can reasonably estimate that Asia will, once more time, show the world that they can promptly catch up.

CONSTRAINTS

Faced with an unprecedented interest as part of international players, Hong Kong and Singapore have been gradually enhancing local regulation so as to:

  1. Align with international standards and
  2. Gradually operate a “positive discrimination” towards institutions wiling to develop to the region.

Compliance and regulatory constraints have been mounting these last years, especially on the private banking and Wealth Management sectors. Regulatory bodies are now gradually tightening the rules framing the distribution of foreign Collective Investment Funds. Below is a summary of current distribution rules for offshore funds willing to be distributed to institutionals and accredited investors only. One should however keep in mind that such rules will keep evolving and induce higher costs for institutions.

⇒ SINGAPORE

While distribution to Institutionals does not require any registration, the offering of funds to accredited investors requires to be registered under the “restricted scheme” (section 305 – Securities and Futures Act).

But what is an accredited Investor as per MAS regulation?

As per MAS (Monetary Authority of Singapore) guidelines, an accredited investor is:

  • an individual whose net personal assets exceed SGD 2M (about USD1.5M) or whose income in the preceding 12 months is not less than SGD 300,000 (about USD230,000).
  • A corporation with net assets exceeding SGD10M (USD7.6M) in value as determined by its most recent audited balance sheet.

Potential changes

The MAS is currently evaluating the possibility of giving choice to investors to make a personal choice whether to be considered as “accredited investor”. This comes certainly with the objective of avoiding too much marketing towards accredited investors because offering to them is not as restrictive as offering towards public investors. If the change is confirmed, any accredited investor will become “public” (unless otherwise elected). This would accordingly prompt foreign funds to properly register and get licensed in Singapore.

How to register?

Registration is relatively straightforward and can be processed directly through the MAS online portal (CISNet).

https://masnetsvc2.mas.gov.sg/cisnet/home/CISNetHome.action

Whereas no prospectus was previously required, it is now mandatory to attach to the registration file an Information memorandum. Fund Managers can actually use their existing offering documents, provided they satisfy Singapore regulation.

⇒HONG KONG

Offshore funds aimed at being offered to “Professional Investors” only do not require previous authorization and registration with the Hong Kong Securities and Futures Commission (SFC).

What is a “Professional Investor” as per SFC regulation?

Professional investors gather altogher the institutional investors (banks, insurance companies, brokers, investment managers, etc.) and accredited investors.

…. And an accredited investor?

As per SFC regulation, accredited investors are corporations with at least HK$40M (about USD5M) in assets and individuals or corporations with investment portfolios of at least HK8M (about USD1M). Contrary to Singapore, fund managers in Hong Kong have to provide the necessary documentation (statements) so as to certify that the accredited investor truly qualifies as a professional investor.

Potential changes

Although no formal guidance has been published yet, the SFC recently indicated (informally) that they may adopt a more restrictive position and treat marketing to professional investors as marketing to public, therefore forcing managers to properly register and license funds on the HKG Stock Market.

Asia will definitely remain a predominant market where it makes absolute sense to develop a presence. However and considering the current mounting regulatory constraints, there will be a need sooner or later to show increased commitment and, to a certain extent, setup locally. Whereas this will induce short-term costs, related opportunities of development will largely compensate  medium-long term growth potential.

TRENDS IN ASIA

The current global outlook is definitely unstable and places investors in a relative uncertainty over where they should allocate their investments. Among this “gloomy” and very volatile situation, Asia definitely remains one of the only emerging regional market that still benefits from a positive level of confidence as part of international investors and economists. I recently attended a conference organized by the French Chamber of Commerce on current economic trends in Asia. Mr Manu Baskharan (Centennial Asia Advisors) and Antoine Chery, chief of the French Economic Service for Asean were the speakers of this much attended event.

Below is a summary of the main points addressed during the conference:

CHINA: Following an impressive decade of rocketing growth rates, China is definitely entering into a much slower pace of growth. This should not be such a matter of concerns except that historical growth was artifically fuelled by heavy investments, creating by itself a vicious circle. Recent incidents raised fears of a potential brutal landing but the country is still on tracks. As the chinese government is gradually experimenting a shift towards a more sustainable growth (consumer oriented), it is expected that episodic shocks will happen but no collapse.

INDIA: definitely poised to rebound. The fall in crude prices comes to a very oportune time and should help tame the inflation, improve current account deficit and provide a conducive environment for investments. Risks are not alienated though and Modi’s islamophobia culture still represents a true issue that could lead to political divisions.

INDONESIA: Stabilizing but still fragile. Infrastructure, business environment and productivity improvements are the key issues that the government must tackle. Current account deficit remains however the biggest risk to a country that needs such important structural changes. Reforms are on tracks and provided so far a positive sentiment to markets. If proved efficient and well managed the country shall meet up again with min 6% growth rates.

THAILAND: The country is somewhat stabilizing but outlook remains unstable. Political risk is very high in near term and could hamper the government’s recent stimulus measures and country’s exports revival

MALAYSIA: Making a comeback, the country’s outlook is positive in the short-term but more uncertain over the long-term. Structural improvements shall boost Foreign Direct investment but domestic headwinds may hamper this positive outlook (subsidies cut, declining consumer confidence, impending GST implementation).

PHILIPPINES: The situation is one of the best ever experienced in decades. Growth prospects are robust, private and public investments are rising, foreign investors are increasing their presence in the country and a peace deal with muslims rebels in Mindanao was finally signed. But politics definitely remain a worry. Next elections are already in 2 years.

VIETNAM: The country has somewhat overcome the worst, fixing some financial imbalances but the situation remains risky. Growth prospects are hampered by slow credit growth, continued closure of domestic firms and structural problems in banks and state-owned entreprises

HONG KONG : Resilient economy that will definitely benefit of China’s opening, making Hong-Kong the key gateway to Mainland China. Recent protests have definitely raised political damages but all in all long term prospects are positive.

TAIWAN: Relatively positive long term growth prospects thanks to US recovery.

KOREA: positive prospects supported by the US recovery, record foreign direct investments. Drop in oil prices has a double edged impact: It could boost country’s growth but at the same time negatively impact exports if it turns out to be caused by slower demand in China.

JAPAN: Opinions are quite ambivalent. There is a political will for fundamental changes but the country is still struggling to regain momentum as its population declines and ages.

SINGAPORE: Despite domestic headwinds and slower growth prospects, Singapore will be a huge winner of current ASEAN regional integration process. Business friendly environment and positive growth prospects in the region are turning Singapore in one of the key hub to radiate in South East Asia.

All in all, prospects are positive for ASIA but many headwinds could induce punctual downward shock in the short-term. Besides this relative positive sentiment vis-a vis Asia, time is definitely for caution as global environment is clearly gloomy with many uncertainties and fears arising from tensions in Middle-East, Fed rates rise, Europe sluggish growth. Where this could be seen as a difficult scenario for investments, one should remind that this is the perfect opportunity to closely follow those countries that definitely benefit from strong fundamentals allowing them to strongly rebound when clouds move away…though not in the short-term.