Maturing Market, Emerging Opportunity—the Transformation of Asia
We're seeing a lot more fund managers setting up offices, larger numbers of employees relocating to Asia, and a number of functions previously managed out of New York or London transplanting to Asia to better represent the significant growth in both inward investment into the region and asset-gathering within Asia.
The Staggering Potential of Asia's Retail Investors and How Asset Managers are Responding
[Editor's note: This article is the first in a series of special reports regarding the asset management industry in Asia.]
Asset management is ripening in Asia. Asset managers must rapidly evolve their strategies to address wealth accumulation and an amassing pool of investible assets within the region, combined with the emergence of retail investors with diverse needs. In parallel, the long-term move toward integrating Asia's markets, with an emerging regional superstructure and infrastructure, is reshaping the face of Asia's asset management industry with global implications.
It is difficult to generalize about Asia's investors and asset management industry. Asset managers themselves have distinct areas of focus within institutional and retail investment. Data can be challenging to come by and inconsistent. Still, through a review of market developments affecting onshore retail investors—supported by statistics and anecdotal evidence—a picture emerges of an industry landscape undergoing transformation.
Asia's investor community—bigger, wealthier and underpenetrated
Regional wealth is increasing both among high net worth individuals (HNWIs) and the middle class, but as an investment community, the Asian retail market is underpenetrated. According to The Boston Consulting Group's Global Wealth 2013 report, Asia-Pacific will surpass North America as the world's largest wealth region by 2017.1
China is said to be a key driver of this growth with a projected gain in wealth of 104 percent by 2017 that would place it as the world's second wealthiest country, ahead of Japan. The same report predicts that India's wealth will jump 127 percent.
Growth in the middle class is contributing to regional wealth. By 2030, two-thirds of the world's middle class will live in Asia-Pacific, with China's middle class reaching one billion, according to a report by Ernst & Young/SKOLKOVO Institute for Emerging Markets Studies.2 A consumer-oriented and young middle class is expected to drive growth, especially in the sectors of consumer finance, healthcare, education, green business and infrastructure.3 Economic growth in turn drives investor confidence.
A diverse, burgeoning middle class
Asia's middle class is not uniform; it comprises multiple segments with varied income levels and purchasing power. Estimates vary by country and are challenging due to a range of issues, including data quality. Silk Road Associates numbers emerging Asia's middle class at 501 million based on an annual per capita income of US$5,000. The estimate changes to 286 million when annual income adjusts to US$7,500.4
Asia-Pacific has more HNWIs than any other region. In 2011 Asia-Pacific's population of HNWIs grew by 1.6 percent to 3.37 million individuals, compared to a 0.8 percent gain in the rest of the world.5 The Wealth Report 2013 by Knight Frank expects the biggest growth rates in HNWIs to occur in Asia's emerging economies. For example, the report predicts a 687 percent growth in Myanmar's HNWIs, followed by growth rates of 402 percent and 369 percent for Indonesia and Mongolia, respectively, between 2012 and 2022.
The accumulation of wealth is also becoming inter-generational. Wealth succession is emerging as a top discussion point among many rich families in Asia, despite a reluctance and cultural taboo around the topic in some circles. At the same time, wealth remains concentrated within the HNWI category. In 2011, according to Capgemini's Wealth Report, wealth increased by 1.5 percent for Asia- Pacific's so-called "millionaires next door"—or those with US$1 million to US$5million in investable wealth.5 Seventeen percent of Singapore's citizens are worth more than $1 million, the most in the world.6
Drivers of wealth
In Asia, economic growth is closely tied to wealth accumulation due to the prevalence of family businesses. Family businesses comprise 50 percent of all listed companies and 32 percent of Asia's total market capitalization according to one study.7
High and rising savings rates are another contributor. It is difficult to account for the higher savings rates in Asian economics, and savings levels vary by country. China's household savings rate, which now exceeds 50 percent of GDP, is noteworthy. As a whole, domestic savings rates in the developing economies of Asia are forecasted to remain steady over the next 20 years.8
The Towers Watson Savings Attitude Survey, conducted among 4,701 young, wealthier-than-average, working-class male employees in China and India, found that motivations for saving include housing, children's expenses, medical expenses, retirement and general savings.9 Without thinking much about retirement, the study finds, many have adequate savings, but there is a need to change the culture of saving from short- to longterm. According to Andrew Lawson, global custody product manager at J.P. Morgan, "Along with a growing middle class, there is an increased expectation for quality of life and the associated need to take ownership of one's own investments."
Underpenetrated, not diversified
But how aggressively has all this wealth been invested? There are a number of indicators of low penetration of investment products. For example, discretionary products make up approximately five percent to 10 percent of all products, versus about 30 percent in traditional wealth centers.10 Investments from Asia compose only 13 percent of the mutual fund industry's global AUM, as compared to 52 percent and 35 percent for the Americas and Europe, respectively.11
Overall, there is a lack of investment diversification behind AUM inflows. Alternatives, such as property, gold, insurance products and bank deposits—for a variety of reasons— siphon off investment dollars. In looking at Asia in comparison to the West there are some fundamental differences in views around areas such as investment risk and property investment. Accordingly, the ratio of traditional to alternative investments seen in the West may not be the correct benchmark when looking East. A study by Fitch Ratings found that domestic funds are weighted toward fixed income, and investment flows in 2012 showed continued preference for bond and money market funds.12 In a number of markets, concentration in onshore fund products persists; for example, onshore mutual funds constituted 88.9 percent of regional AUM in 2012, excluding Japan.13
Emerging regional superstructure and infrastructure
Exacerbating investor concentration in onshore products is the cost inefficiency, and in some cases, impossibility, for asset managers to operate across the region. Regional funds management remains fragmented; each jurisdiction has its own domestic funds market with varying degrees of restrictions around cross-border funds.
But the superstructure and infrastructure of Asia's asset management industry are evolving. The Asia region Collective Investment Vehicle Passport, or Asia Region Funds Passport, aims to support the crossborder distribution of Asia-based funds. A passport could support the creation of a regional superstructure or the integration of the funds management industry across the region.
According to The Boston Consulting Group's Global Wealth 2013 report, Asia-Pacific will surpass North America as the world's largest wealth region by 2017.
Longer term, the promise of a passport implies lower fees for investors through greater efficiencies and increased competition, enabling, among other things, direct access to offshore funds and the distribution of single funds across multiple markets. It also potentiates greater investor choice through direct access to more funds, markets and expertise. In the short- to medium-term, challenges to achieving a passport include varied levels of fund market development, the continuation of captive distribution in many markets, investor predilection toward locally invested products, and differences in many key areas, including legislative and tax regimes.14
In southeast Asia, progress on the ASEAN funds passport—initially involving Singapore, Malaysia and Thailand—has been slow to develop, but continued dialog and activity evidences the long-term trajectory toward market integration. Perhaps closer on the horizon is the Greater China passport, beginning with the January 2013 announcement that consultations are underway on the mutual recognition of funds between Mainland China and Hong Kong. Explains John Murphy, custody and fund services product executive at J.P. Morgan, "If implemented, funds managers will be able to register and sell Hong Kong-domiciled products in China to retail investors and vice versa. There is a lot of press coverage and dialog around whether a China passport could become a Greater China Passport that includes Taiwan."
Supporting trend—RMB internationalization
RMB internationalization, and the RMB's long-term trajectory toward being a major on par with USD and EUR as a global currency, is a lynchpin in the development of the Greater China Passport. "We are witnessing a huge build-up of RMB balances in Hong Kong and moving into Taiwan, with the trend continuing in Singapore and increased interest in RMB-based products," says Lawson. "The general populace believes that the RMB will be a strong currency that will appreciate over time. The first day that I went to a cash machine in Hong Kong and had the option to withdraw HKD and RMB from the same machine was a clear signal to me of the extent to which the RMB is internationalizing."
Dim sum bonds are becoming available in Hong Kong, Singapore, Taiwan and London, and companies are launching RMB-denominated bonds. Investor demand for RMB bonds is driving asset managers to develop new products to satisfy client desire to invest in these bonds and maintain exposure to RMB. The growth of multi-currency mutual funds in Taiwan, tied to changes in Taiwan regulations related to offshore RMB, exemplifies this trend.
On the other side of the coin are infrastructure developments like the ASEAN+3 Bond Market Forum and Asian Bond Markets Initiative. Such initiatives are laying the groundwork for more integrated capital markets across the region by building the underlying mechanics necessary for more efficient markets. A flurry of initiatives this year—including the rollout of the ASEAN Trading Link across Singapore, Thailand and Malaysia and the Invest Asia 2013 Investment Roadshow are coalescing to build momentum around infrastructure developments and investor education as to the value of regional investment.
Regional funds management remains fragmented; each jurisdiction has its own domestic funds market with varying degrees of restrictions around cross-border funds.
Moving offshore onshore
In parallel, Singapore and Hong Kong are emerging as hubs for offshore wealth management within the region as Asia's HNWIs increasingly seek offshore solutions closer to home than traditional centers, such as Switzerland.15 Research by WealthInsight indicates that Singapore will surpass Switzerland as the largest offshore wealth center as measured by AUM by 2020.16 Singapore's AUM has grown to US$550 billion from US$50 billion in 2000, with about US$450 million attributed to offshore wealth.17 Hong Kong is also a recipient of funds transplanted from Europe's historical private banking locations.18
Asset managers respond
Key to the maturation process within Asia is the ability of asset managers to satisfy investor demand amid changing dynamics. Toward this end, they are shifting their approaches within Asia's diverse context— including fine-tuning their strategies to service changing client needs.
Depending on their focus, they are adopting a range of strategies. For those foreign players operating in the offshore wealth management hubs, to compete against entrenched local firms and grow profitably in the midst of high operating costs, it is imperative to properly target AUM and to understand the cultural and behavioral nuances of investors and the operating context of the offshore wealth centers.19 Whether to establish a local presence through branches or partnerships and which products and services to provide are cited among the critical decisions.
Offshore asset managers with a mass retail focus often sell products through institutions or wholesale distributors in and around the region to retail investors, given that distribution is challenging in countries where distribution is captive or there are dominant players, among other factors. Those engaged in onshore asset management for retail investors are preoccupied with where to launch local domiciled products in and around Asia and what, when and how to do this.
Redefining their presence
According to Murphy, "We're seeing a lot more fund managers setting up offices, larger numbers of employees relocating to Asia, and a number of functions previously managed out of New York or London transplanting to Asia to better represent the significant growth in both inward investment into the region and asset-gathering within Asia. They are doing so to better service clients or make decisions that are more relevant to the region and the assets being based here."
In the HNWI space, for example, Coutts, a private bank under the Royal Bank of Scotland, plans to double its client-facing employees in Asia within the next two to three years, and Julius Baer reported plans to more than double its on-the-ground staff by 2015.20
Asia's middle class is not uniform; it comprises multiple segments with varied income levels and purchasing power.
The influx of expatriates and the creation of a pipeline for their longterm displacement by local talent are additional indicators of a maturing Asian asset management industry. For example, efforts are underway to train locals in private wealth management and encourage employee retention. A scarcity of local skills and expertise is leading to the establishment of training programs in private banking and wealth management at local universities. As a case in point, the Hong Kong Institute of Bankers will add two new streams to its Postgraduate Diploma in Wealth Management in 2013.21
A strategic focus
Asset managers are choosing their market presence strategically. Emerging Asia has 274 cities with populations greater than 750,000 inhabitants.22 It is not possible to be in all markets from a cost and logistics perspective let alone to compete everywhere effectively against entrenched players. Some firms have a strong presence in one or two countries only and choose where to invest based on their core capabilities or investment sweet spots. Others are entering selective markets opportunistically, for example, establishing a presence in Hong Kong in anticipation of eventual broader access through the establishment of a Greater China Passport.
By 2030, two-thirds of the world's middle class will live in Asia-Pacific, with China's middle class reaching one billion.
"The successful asset management players in Asia have clarity around their targets that involves a countrydriven investment strategy and offerings sharply attuned to market nuances and investor demands," says Lawson.
"Investor needs vary significantly due in part to cultural and demographic differences," he adds. "Asset managers must distinguish among investor bases by country and tailor their offerings accordingly to understand client interest and salability." For example, says Lawson, "the income needs of aging Japanese pensioners vary greatly from the investment growth demands of younger generations in the Philippines or Vietnam." Further, there is industrywide recognition of the need for continued investor education to encourage private retirement savings in Asia.
Seventeen percent of Singapore's citizens are worth more than $1 million, the most in the world.
Investor demand and changing market dynamics require a nuanced understanding and fine-grained approach for those looking to capitalize on Asia's emerging regional wealth and investment appetite. The ripening of Asia is underway— and while much development lies ahead for the region's asset management industry—asset managers are looking with a sense of urgency on how to capitalize on the opportunity today.
1 Diana Britton, "The Future of Wealth? Look to the East," May 30, 2013, wealthmanagement.com.
2 Ernst & Young, "By 2030 two-thirds of global middle class will be in Asia-Pacific," 25 April 2013, www.ey.com.
3 World Economic Forum, "Asian middleclass to drive growth," 18 June 2009, www. weforum.org.
4 Silk Road Associates, "The Rise of Asia's Middle-Class: The world's new growth driver," May 2, 2013, www.silkroadassoc.com.
5 Capgemini and RBC Wealth Management, "Asia-Pacific Wealth Report 2012," September 19, 2012, www.capgemini.com.
6 Myriam Robin, Property Observer, "Rich turn to Asia as exclusive wealth management firms park money in Singapore," 23 April 2013, www.propertyobserver.com.au.
7 Credit Suisse, "Asian Family Businesses Report 2011," October 2011, www.efiko.org.
8 Eswar S. Prasad, National Bureau of Economic Research, NBER Reporter 2013 Number 1: Research Summary, "Saving in Developing Countries," www.nber.org.
9 Bob Charles, Towers Watson, "Private Pensions in Asia: Challenges and opportunities in a post-crisis world," January 2013, www.imf.org.
10 Capgemini and RBC Wealth Management, "Asia-Pacific Wealth Report 2012," September 19, 2012, www.capgemini.com.
11 Justin Ong, PwC, "Distributing funds in Asia's growth market," www.pwc.com.
12 Richard Newell, Investment & Pensions Asia, "Fixed Income funds key to China market growth," 22 May 2013, www.ipe.com.
13 Cerulli Associates, "The Cerulli Report: Asian Distribution Dynamics 2013," June 7, 2013, www.cerulli.com.
14 Andrew Wilson, PwC, "Asia Region Funds Passport: The future of the funds management industry in Asia," November 11, 2010, www.pwc.com.au.
15 Capgemini and RBC Wealth Management, "Asia-Pacific Wealth Report 2012," September 19, 2012, www.capgemini.com.
16 Sarah Krouse and Mike Foster, Financial News, "Wealth managers flock to Singapore as Switzerland suffers," 7 May 2013, www.efinancialnews.com.
17 Robert Frank, CNBC, "Singapore Will Replace Switzerland as Wealth Capital," 22 April 2013, www.cnbc.com.
18 Chris Davis, South China Morning Post, "Going private; More specialist bankers needed for rising tide of HNWIs," May 4, 2013, www.classifedpost.com.
19 Capgemini and RBC Wealth Management, "Asia-Pacific Wealth Report 2012," September 19, 2012, www.capgemini.com.
20 Sarah Krouse and Mike Foster, Financial News, "Wealth managers flock to Singapore as Switzerland suffers," 7 May 2013, www.efinancialnews.com.
21 Chris Davis, South China Morning Post, "Going private; More specialist bankers needed for rising tide of HNWIs," May 4, 2013, www. classifedpost.com.
22 Silk Road Associates, "The Rise of Asia's Middle-Class: The world's new growth driver," May 2, 2013, www.silkroadassoc.com.