A handful of U.S.-based investment consultants continue to expand in a challenging Asia-Pacific marketplace dominated by sovereign wealth funds and national retirement plans, betting that the region's fast-paced growth will open up new business opportunities over the medium term.
Over the past five years, that quartet has continued beefing up initial outposts in developed markets such as Japan and Australia, and hubs in Singapore and Hong Kong, while moving farther afield in the region.
Mercer added an office in China in 2008 and another in South Korea in 2009; Cambridge opened a China office in 2011; Russell Investments launched operations in South Korea and China in 2007 and 2011, respectively. Towers Watson has investment consulting staff in Beijing, Shanghai, Seoul, Kuala Lumpur and Manila.
Most of those outposts are two- or three-person operations, in part reflecting institutional markets in the region that currently offer dramatically fewer opportunities for investment consultants than are found in the U.S. and Europe.
A survey this year by research firm Greenwich Associates found the 30 biggest sovereign wealth funds and national pension schemes in Asia account for roughly 90% of an $8 trillion pool of institutional assets in the region, not including the Japanese and Australian markets, noted Markus Ohlig, Greenwich's Singapore-based managing director, Asia-Pacific.
The survey of just over 220 institutional investors in the region with more than $250 million in externally managed funds found only 29% used investment consultants, compared with 89% of U.K. institutional investors surveyed and 84% of U.S. institutional investors, according to Greenwich. Contributing to that low demand, many big institutional investors in Asia also remain intent on expanding their internal management capabilities.
Greenwich's research found that Mercer and Towers Watson were the investment consultants tapped most often in the region outside of Australia and Japan, followed by Cambridge Associates and Russell, said Mr. Ohlig.
In Australia, however, two local investment consultants continue to dominate that market. JANA Investment Advisers, Sydney, had 37.2% of Australia's institutional assets under advisement as of June 30, and Frontier Advisors LLC, Melbourne, had 28.3%, according to Rainmaker Group, Sydney, a superannuation fund and investment management sector research firm. By contrast, Towers Watson claimed a 12.5% share; Mercer, 10.1%; and Russell, 7.6%. (Cambridge, which opened a Sydney office in 2007, decades later than its competitors, didn't rank among the top 10.)
Apart from sophisticated sovereign wealth funds, there isn't a long list of pension funds or endowments and foundations in Asia — outside of Japan and Australia — seeking help from consultants in running large alternatives allocations, noted Richard Johnston, a Hong Kong-based managing director with Albourne Partners Ltd., a London-based alternatives-focused consulting firm with offices in Tokyo, Hong Kong and Singapore. Most of Albourne's work in the region is done on behalf of its North American clients, he said.
In that asset-rich but narrow Asian institutional universe, retainer relationships — the bread and butter of investment consultants' U.S. and European businesses — often account for a relatively small part of their Asian revenues.
Instead, project work, such as helping sovereign wealth funds evaluate alternative asset segments, and selling access to a consulting firm's research on money managers or portfolio construction account for much bigger pieces of consultants' Asian business pie.
Garry Hawker, a partner with Mercer (Singapore) Pte. Ltd., estimates that project work accounts for 60% to 70% of the firm's revenues in the region, excluding Australia and Japan. The 30% to 40% in retainer work, meanwhile, includes revenues coming from sovereign wealth fund demand for Mercer's global investment manager database research product.
In a separate interview, Andrew Kirton, Mercer's London-based global head of investment consulting, noted that demand for Mercer's research has contributed to the firm's strong market position among SWFs; he said 35 of those funds around the globe subscribe to the investment manager database.
Alvin Tay, managing director of Cambridge Associates' Singapore hub, which has seen its staff jump to 50 from 15 five years ago, said Cambridge last year began actively marketing its own alternatives research offering, Research Navigator. It has attracted eight clients in the Asia-Pacific region, amid strong interest from sovereign wealth funds and large government agencies in particular, he said.
Mr. Tay said those eight research clients helped lift the proportion of retainer relationships among Cambridge's 30 or so clients in the region to roughly 90% of the total, spread out fairly evenly across four institutional segments: family offices; endowments and foundations; pension funds; and sovereign wealth funds/government agencies.
Despite relatively narrow near-term business opportunities, Asia's growth prospects remain a compelling reason for being in the region, executives at Mercer, Towers Watson, Russell Investments and Cambridge say.
Asia is still “more promise and potential than it is realized business,” noted Mercer's Mr. Kirton. But the region's business is growing fast and “if you're not there ... not building relationships, not building your brand, then one day you might regret that,” he said.
While declining to discuss how profitable Towers Watson's Asian business is at present, Carl Hess, the firm's New York-based global head of investments, said there are good opportunities in the region now and all signs point to even better opportunities over the medium to long term.
For example, even as sovereign wealth funds in the region continue to build their internal management capabilities, some industry watchers predict the pendulum could swing back again.
Fast-paced asset growth could leave many sovereign wealth funds stretched as their portfolios become ever more complex, leading to more demand for investment consultants and external managers alike, noted Ken Yap, Singapore-based director of research firm Cerulli Associates. Some industry veterans noted the possibility that sovereign wealth funds could turn to those consultants to manage allocations to specific alternatives market segments.
Trevor Persaud, Singapore-based managing director for Russell Investments' operations in Southeast Asia and Taiwan, said his firm's efforts to build its investment consulting team in Asia now is consistent with Russell's goal of promoting its core offering as an asset manager and provider of investment solutions, including outsourced CIO services — a business with a long lead time that requires “developing relationships, credibility and trust.”
If there are relatively few potential clients now, there'll be more in the future, with “sufficient numbers out there to keep us busy” informing institutions about the benefits of adopting the Russell model, he said.
Consultants also predict that serving private banks and other gatekeepers for high-net-worth individuals in the region will be an even greater business opportunity in the coming years.
Towers Watson works with pension funds, sovereign wealth funds and insurance companies in Asia, but “we also have a focus on wealth management,” noted Mr. Hess. “The capital accumulating in Asia will be in different forms than that in much of the West — much less in defined benefit pensions — and so we've prepared to work with a variety of institutional pools,” he noted.
Mercer's Mr. Kirton noted the same trend. The wealth management industry “is probably the biggest opportunity for us in Asia in the medium term,” he said, adding that the emergence of mass savings markets in countries such as China and Indonesia is a question of "when, not if.” n
This article originally appeared in the October 29, 2012 print issue as, "Asia-Pacific region fertile ground, but it's a tough row to hoe for now".