ASIAN GIANTS: Long-term approach

China and India's asset management pies are bite size just now, but a growing number of money management firms are reserving seats at the table, expecting much larger servings to come.

For the moment, with little or no scope to invest local money abroad, and defined contribution retirement systems just being put in place, the biggest game in town for foreign firms — if the town is Shanghai or Mumbai — is domestic-currency mutual funds.

At the end of 2005, China's mutual fund market was $55 billion and India's, $45 billion — minuscule on a global scale. Even leading foreign firms, such as Prudential PLC and Franklin Templeton Investments, boast combined assets under management in those emerging giants of $5 billion or less.

But rapid growth makes it easy to focus on their more compelling futures. According to Ken Yap, quantitative research director with Boston-based Cerulli Associates, China's mutual fund market should double to $110 billion over the coming five years, while India's should climb to $67 billion over the same period.

And in 10 years time, the broader asset management market — including domestic institutional assets that are just now beginning to open up to foreign firms — should show even stronger growth. According to data from Hong Kong-based consultancy Stirling Finance Ltd. and Reuters Global PLC information service, China's total assets under management should swell to nearly $3 trillion from $340 billion over that span.

"For any global manager to be truly global, you have to have a strategy for (the Chinese and Indian) markets 10 years out," said Vincent Duhamel, managing director of Goldman Sachs (Asia) LLC, Hong Kong.

The watchword, however, is "patience."

"Take a long-term approach and you won't be disappointed," advised Ashu Suyash, country head, Fidelity Fund Management Pvt. Ltd., Mumbai, which was launched July 2004.

Early on, markets such as China and India will be less financially rewarding and more frustrating than people expect, "but if you can get a solid long-term plan in place and follow through with it, there are enormous opportunities," predicts Hugh Young, the Singapore-based managing director of Aberdeen Asset Management Asia. Ltd.

In China, which limits foreigners to 49% minority stakes in money management joint ventures, such partnerships accounted for roughly 25% of the country's mutual fund market at the end of 2005, according to Cerulli Associates. Leading the list, in terms of assets under management, were the money management arms of European financial conglomerates, with Deutsche Asset Management Ltd., ING Investment Management Inc., Fortis Investments, Societe Generale Group Asset Management and Bank of Montreal affiliated ventures accounting for a combined 16% of the total market.

Including these firms, there were roughly 20 foreign financial institutions that had formed joint ventures with Chinese banks, fund managers and insurance companies as of December, according to Cerulli. Others include Merrill Lynch Investment Managers, Allianz Group, UBS AG, Prudential PLC, American Insurance Group, Franklin Templeton Investments and JPMorgan Asset Management.

The size of the stakes has ranged widely, with firms such as Merrill Lynch taking a 16.5% stake in BOC International China Ltd. and BOC International Holdings, part of the Bank of China. On the other end of the spectrum, AIG Global Investment Group has the maximum stake, increasing its holding in AIG Huatai Fund Management Ltd., its joint venture with Huatai Securities, to 49% from 33% last year.

In India, foreigners willing to plunk down a hefty $50 million in capital can have a wholly owned money management firm, or a 75% stake for the less painful sum of $5 million. The system is flexible enough to allow a money manager such as Fidelity — which "likes working in markets entirely on our own" — to set up shop with a silent partner, said Ms. Suyash. In a statement, Fidelity said China may well be a significant market for the firm in the future but "present rules don't allow us to conduct business in the way that we would want to."

According to Cerulli, foreign-owned firms and joint ventures accounted for roughly 60% of India's mutual fund market at the end of 2005. Ventures associated with Prudential PLC, Standard Life Group, Franklin Templeton, Sun Life Financial Group and Merrill Lynch & Co. Inc. together accounted for just under 40% of the total market.

For the first wave of money managers entering China and India, the biggest hurdle has been distribution. Amid regulatory restrictions limiting the scope for product development, and with performance still not a key selling point, it all comes down to "brute force in selling," said Shiv Taneja, a Singapore-based director with Cerulli.

With allowable investment categories narrowly defined, "one of the only ways to differentiate yourself is through marketing," making both far-flung countries high-cost places to operate in, said Chris Ryan, the Hong Kong-based CEO of ING Investment Management Asia/Pacific.

Norman Sorenson, president of Des Moines, Iowa-based Principal Global Investors, said his firm cleared the distribution hurdle in both countries, hooking up last year with China's third largest bank, Construction Bank of China, and in India four years ago, with Punjab National Bank and Vijaya Bank.

The Chinese venture, CCB-Principal Asset Management Co., is 65% owned by CCB; 25% by Principal; and 10% by a state power company. Mr. Sorenson said the venture was the top asset gatherer in China in 2005, pulling in $780 million.

In India, Principal holds a 65% stake in Principal PNB Asset Management Co., with Punjab National Bank holding 30% and Vijaya Bank holding 5%. Mr. Sorenson said that venture enjoyed a 50% jump in assets last year, to $1.6 billion.

In contrast to China, where the big state banks dominate distribution, market watchers say India has more open architecture, with banks, nationwide brokers and more regional financial advisers all playing a big role. "Everybody sells everybody's products," said James Aird, the head of global strategic development with Edinburgh-based Standard Life Investments.

That open architecture system helped clear the way for Fidelity's decision to come to India, said Ms. Suyash. Fidelity looked at the vast size of the country and decided to work with select intermediaries in all distribution channels. Fidelity, which launched its fourth mutual fund in March, has around $800 million in assets under management, she said.

Cerulli's Mr. Taneja said conglomerates that have irons in several fires in these quickly developing capital markets have a leg up in China and India at this stage of the game. For the institutional managers that are such a big part of the U.S. money management scene, "it's still five, seven or 10 years before their time," he said.

Mr. Ryan said ING benefited from having established insurance or banking operations in China and India. The asset management ventures launched in India six years ago and China three years later were "very synergistic with our other businesses' long-term aims."

"Because these markets are emerging, it's hard to pick exactly what strand of asset accumulation is going to be best, making it important to have multiple capabilities in place," agreed Paul Hancock, regional head, pensions, Asia for London-based insurer Prudential PLC.

Prudential launched Prudential ICICI Asset Management Co. Ltd. — a money management joint venture with ICICI, India's second biggest bank — in 1998. It teamed up with ICICI again in 2000 for an insurance joint venture. The giant insurer came to China more recently, launching money management and insurance operations in ventures with China's CITIC Bank in the past two years.

With insurance and fund management operations in both countries, "we see opportunities from both sides of the business," said Peng Wah Choy, Prudential's regional head of sales and distribution in Hong Kong.

In the short term, however, the focus is on retail funds. As of February, Prudential ICICI Asset Management had roughly $5 billion in mutual fund assets under management, or about 11% of the country's $46 billion total mutual fund market, said Mr. Choy.

AIG Global has also made recent moves to expand into the Indian market. The company has had an insurance presence in India since 2001, said Steven Guterman, senior managing director and head of global business development for the company in New York. AIG Global is now in the process of expanding its money management business along with its insurance presence, which is not a joint venture, but rather a wholly owned subsidiary of the company.

"There are certain advantages that we have, being part of a global insurance company," said Mr. Guterman. "We decided to go into India 100% and we can do that, and many other things, by tapping our existing corporate infrastructure."

Mr. Guterman said that while there is "tremendous potential" in the Indian money management industry, finding the right people to run the business can be one of the most considerable challenges to succeed in the short term and the long run. "Finding the talent is the hardest part right now," said Mr. Guterman, adding the firm has received help from its Indian insurance employees in attracting investment talent. "You can't just take someone from New York or London and tell them to go run the business."

In February, AIG brought on Indian money management veteran Ravi Mehrotra, formerly the president and head of operations for Franklin Templeton's India money management operations, to head its initiative. Mr. Mehrotra will be responsible for building AIG's asset management business in India.

Money management executives said both markets have the mouth-watering potential of rapidly swelling middle classes combined with high savings rates.

"There's a huge savings market in India and it is one of the fastest growing economies in the world," said Sukumar Rajah, director and CIO of Franklin Templeton Asset Management (India) Pvt. Ltd., Alwarpet, Chennai. "Surging demand for investment products has made India a sweet spot for our money management," he said.

Franklin Templeton now has 500 to 600 employees handling roughly $4 billion throughout India. The firm made its most significant move in the marketplace in 2002, when it acquired a 100% stake in Chennai-based Pioneer ITI AMC Ltd. of India for roughly $50 million.

To date, Franklin Templeton is the only foreign investment management firm to take complete ownership of an Indian fund company, a move that Mr. Rajah said will allow Franklin Templeton to benefit as the market grows and more firms enter the country.

While China appears poised for more dramatic growth, several executives seemed to feel that India offers foreign-affiliated ventures greater scope for near-term profits.

Standard Life Investments' Mr. Aird said his firm's tie-up with India's Housing Developing Finance Corp. — which boasts a "huge constituency, great branch network and sterling reputation" — has been "a great success … By year two, we were profitable."

One factor that helped the venture, HDFC Asset Management Co. Ltd., was what proved to be a prescient call that Indian investors would become more interested in equity funds. HDFC acquired the local operations of Zurich Insurance Co. in 2003, boosting the equity portion of its assets under management from 4% at the time of the acquisition to 55% today, he said.

India is "already an interesting and significant place to do business, and it's going to be a great deal more interesting and significant" in the future, Mr. Aird said.

China has equally huge potential, but Standard Life Investments, despite a lot of interest, "hasn't been able to identify the right deal at this point in time," said Mr. Aird. China's bank-dominated distribution system, and the "IPO mentality" that sees the bulk of mutual fund sales come during the initial month of a new fund launch, is part of the problem. As many as 30% of Chinese mutual funds have 50% less assets now than they did at the end of their offer periods, he noted.

Market watchers say that situation could change as regulators continue working to hammer out key building blocks of the capital markets in those countries.

China, for example, is putting the finishing touches on a qualified domestic institutional investor system that would allow domestic institutions to park a portion of their funds offshore.

China laid the framework for a voluntary corporate pension system in 2004, and over the next few years the fruits of those efforts could yield significant opportunities for money managers, said Phil Shirley, director of Mercer Human Resource Consulting in Hong Kong.

India is also moving ahead, but market-watchers aren't ready to make bold predictions just yet. A 401(k)-type system will be important one day, but it will be "the icing on the cake" for Fidelity's plans of growing its asset management business, Ms. Suyash said.

Money managers are "looking at the region at different levels depending on what the focus is in their home markets," said Robert Haber, managing director of Asia ex-Japan with Barclays Global Investors, San Francisco.

Several institutional and fixed-income heavyweights among U.S. money managers said they continue to size up China and India from vantage points such as Hong Kong.

GSAM's Mr. Duhamel and Doug Hodge, the Tokyo-based managing director and head of Asian operations for Pacific Investment Management Co., said big institutional pools of money, such as central banks and financial institutions with offshore treasury offices, represent the low-hanging fruit of the Chinese and Indian markets.

Mr. Hodge said with fixed-income markets in China and India not yet at the stage where PIMCO can put its competitive advantages to good use, it's probably too early for the bond giant to set up shop there.

Peter Fisher, chairman of BlackRock Asia, struck a similar tone.

While BlackRock's global bond and emerging market teams trade in Asian sovereign and corporate bond markets, the firm has not yet developed a product focused exclusively on the region. "We'd like to find a way to bring both our structured credit and our bond trading capabilities to these markets," explains Mr. Fisher. "On the bond side, we'll be looking for the right moment as the markets' depth and liquidity develop further."

For now, BlackRock's Asian operations are predominantly for sales and clients service, as the company manages roughly $30 billion in Asian assets — $7.2 billion for Asian-Pacific clients and $23.1 billion for Japanese clients — from its New York offices.