Eastern and Western asset managers and private banks are lining up to fight for clients across Asia. Not only does the continent account for the lion’s share of the world’s population, but it has long-enjoyed double digit savings ratios and economic growth. According to the Create-Research Consultancy, which models profitable opportunities for investment houses, Asian fund markets should be the place to be. Their compound annual growth rate forecasts – combining data from fund inflows, client numbers and demographics – runs well into the higher teens.
Pension assets in Asia ex-Japan, spearheaded by growth in Taiwan, Malaysia and South Korea, are expected to treble from their current $750bn over the next 10 years.
But before they plunge into the fray, it is necessary for banks and fund managers to analyse the market, pinpoint the area which they will attack and make sure they have the correct business model for success.
Many groups are clearly more cautious in their actions than their often hubristic rhetoric about their Asian ambitions would suggest. Of the 58 per cent of asset houses who see Asia as a growth market, less than 10 per cent see the continent as the ‘dominant’ source of their own growth, reveals research from Create.
Market penetration of Asia by global fund houses has progressed at a “snail’s pace,” according to Create’s CEO Amin Rajan, due to protectionist national regulations aiming to preserve the market share of domestic players. This is coupled with a lack of available financial instruments, such as derivatives. Institutions across the region are also forced to invest domestically, often to boost government bond issuance.
But the main reasons why the results for many groups do not yet match the potential are often cultural. “The lack of a buy-and-hold culture presents a major barrier,” believes Mr Rajan. “Even in Japan, where equity culture took root in the 1980s, investors remain momentum-driven. What they really want is a fast buck.”
It is this failure to adapt to local tastes that is hindering many foreign fund houses, which are falling at the first hurdle when assessing the potential of Asia Pacific markets and putting together a business strategy, believes Min Tha Gyaw, associate director at Z-Ben Advisors, based in the Pudong financial district of Shanghai.
Why have there, he asks, been hugely successful joint ventures and pan-Asian strategies put together by European investment product manufacturers such as German house DWS, while others have floundered?
The problem is that few foreign players have yet grasped the mentality of the Asian public. “Asian investors are buying apartments for their kids and grandkids. Then with 20 per cent of their entire net worth, they will be very aggressive and are prepared to lose sleep,” ventures Mr Tha Gyaw. “Foreign houses try to cater for the big, growing retiring population, with a conservative product, but Chinese investors have already made conservative allocations elsewhere. They are demanding an aggressive product. Foreign fund managers fail to capture this point.”
As well as getting the product right, asset managers must be keenly aware of business conditions, particularly the link between distribution and custodianship, with more and more banks seeking to profit from both activities. “Most will say to a fund house, ‘I will only take your custody if you give me a distribution mandate too’,” says Mr Tha Gyaw.
Two years ago, leading Chinese banks such as ICBC and CCB were among the main players in this game, able to be very selective in which fund houses they linked with. But the market is opening up today, believes Mr Tha Gyaw, who describes “a very dynamic situation” determined by the level of trail commissions paid by fund houses to hosting banks. “Asian banks are far more open-minded than their European counterparts, but it does get excessive from time to time. We tell our clients that banks are like mercenaries, they work with the highest bidder and loyalty lies with the biggest pocket. In a potentially huge market like China, if you have the right product, strategy and marketing, it doesn’t matter if you are a foreign or domestic player.”
Innovation in products is key to investor acceptance in China, believes Paul Burik, a former senior executive in Commerzbank’s asset management division, now engaged by the Shanghai Advanced Institute of Finance as a professor to train portfolio managers and private bankers. “Like Japan, China is about new products in a big segment of the market, much more so than in Europe or the US.”
Those houses which operate in several regions of the world report a much greater knowledge of and interest in investments in Asia than Europe.
