Patience will be key to winning in Asia

A growing number of money managers are gearing up to pursue institutional clients in Asia. Still, industry veterans warn that reaping dividends from the region's stellar growth will require a long-term commitment.

Asia's retail market remains an attraction, but money management firms will increasingly be focused on institutional opportunities in the region, Sze Yoon Ng, a London-based associate director with Cerulli Associates, Boston, said in a telephone interview.

In a July 12 report, Cerulli predicted money managers would see their assets under management grow faster in the Asia ex-Japan region than in other major markets. Cerulli said institutional assets for which money managers can compete in the region will grow to $1.74 trillion by the end of 2016, up 40% from $1.1 trillion at the end of 2012.

The region's prospects haven't gone unnoticed. On July 9, KPMG LLP, announcing the results of the firm's annual investment management business outlook survey, found 28% of the more than 100 senior U.S. asset management industry executives surveyed identified Asia-Pacific as “the most promising region for asset growth,” second only to the 57% who named the U.S.

The growing number of firms knocking on the limited number of big institutional doors in Asia makes it “a bit challenging to make money,” James Suglia, U.S. advisory sector leader for KPMG's investment management practice in Boston, said in a telephone interview. But amid “megatrends” pointing to Asia's growth prospects, growing numbers of U.S.-based money managers are pursuing expansion in that part of the world “irrespective of whether it's hard to make money (there) today,” he said.

For a number of firms, that anticipated growth in Asia will be coming off of a low base.

A few big U.S. money managers already garner more than 10% of their assets under management from Asia-Pacific investors, including Western Asset Management Co. and State Street Global Advisors, at 14% apiece, and MFS Investment Management Inc., at 11%.

A number of U.K. and European managers have even bigger regional footprints, including Schroders Investment Management, at 28%, and UBS Global Asset Management, at 17%.

But other heavyweights have yet to approach 10%. Among them: BlackRock Inc., at 8%; J.P. Morgan Asset Management, 7.4%; Pacific Investment Management Co. LLC, 6.9%; and BNY Mellon Asset Management, 6.1%. All numbers are from Marietta, Ga.-based data tracker eVestmentAlliance, as of March 31.

Money managers note that Asia's institutional marketplace has become considerably more interesting over the past decade or so — with the establishment of a number of sovereign wealth funds and the rapid growth of national pension schemes in markets from China to Korea to Malaysia. Those include the $482 billion China Investment Corp., $57 billion Korea Investment Corp. and China's $180 billion Social Security Fund, said Terence Lam, the Hong Kong-based head of sales and marketing, Asia, for AXA Investment Managers.

Asia's institutional marketplace has “definitely become larger and more exciting” for fund management firms, said Mark Browning, Singapore-based managing director of institutional sales and client service, Asia, with Franklin Templeton.

While the region's big institutional investors are in various states of development, all are rapidly becoming more sophisticated and adventurous — shifting from a focus on domestic fixed income into equities and overseas stocks and bonds, he said.

That shift — from a capital preser-vation, “piggy bank” mentality to a greater willingness to seek appropriate risk-adjusted returns — is a key to leveraging Asia's institutional pools to head off catastrophe for fast-aging populations in the region, argues Frederic Blanc-Brude, Singapore-based research director of the EDHEC Risk Institute.

Over the past month, some of Asia's biggest institutional investors have announced asset allocation shifts in that direction.

On June 7, Japan's $1.2 trillion Government Pension Investment Fund cut its target allocation to Japanese government bonds and other fixed-income instruments to 60% from 67%, while lifting its allocations to foreign stocks and foreign bonds by three points apiece to 12% and 11% respectively, and domestic stocks by one point to 13%.

A week later, officials at Korea's $360 billion National Pension Service said they would cut the target allocation to domestic bonds for the coming year by 1.9 percentage points to 54.2%, while lifting the foreign stock target by 1.2 points to 10.5% and the allocation to alternative investments by 0.7 points to 11.3%.

Such shifts — away from more mainstream asset classes that many big institutional investors in Asia manage in-house — open up more opportunities for big, multiasset class money management firms and managers focused on areas such as emerging market debt or equity, or high-yield bonds.

Money managers say the region's institutional market outside of Japan and Australia — with roughly 20 big sovereign wealth funds, national pension schemes and central banks dominating a landscape devoid of the corporate retirement plans and endowments found in the U.S. and Europe — brings opportunities and challenges.

On the plus side, it's a very efficient market to access, noted Kai Sotorp, a Hong Kong-based managing director and head of Asia Pacific for UBS Global Asset Management, which oversees more than $100 billion in assets for Asia-based clients.

On the negative side, the fact that all of those big institutions are either directly or indirectly controlled by government civil servants — predisposed to avoid risk — is a major behavioral hurdle, said one money management executive who declined to be named.

Another characteristic of Asia's institutional marketplace is what money managers term a relatively voracious appetite for knowledge transfer, as the region's bulge-bracket institutions relentlessly work to become expert at managing portfolios and appraising investment opportunities. Whether that knowledge transfer will find big institutional investors in Asia bringing more and more management in-house is an open question and of direct interest to money managers in the region.

By way of example, recent consolidation in Australia's $1.6 trillion superannuation industry has weighed on that country's crowded money management industry, some say.

In a June 27 discussion at an ICI Global conference in Hong Kong, Pauline Vamos, CEO of the Association of Superannuation Funds of Australia, said the past 10 years have seen “massive consolidation.” The number of superannuation funds has dropped to about 300 today from more than 3,000, with the trend likely to slash that total further toward 100, she said.

The bigger funds that have emerged are increasingly insourcing management of market segments such as Australian bonds and stocks, while their size has given them more leverage in fee negotiations.

The resulting environment has become considerably tougher for money managers, Ms. Vamos said, adding that some have quit the market over the past year. She did not name any.

For the rest of Asia's already highly concentrated institutional market, one question is whether the current lineup of national pension schemes and sovereign wealth funds will continue to dominate the regional landscape as rising national wealth buoys retirement savings, or whether a more diverse landscape — closer to that of the U.S. or Europe — will develop.

Many money management executives expect the basic outlines of Asia's institutional landscape today to remain in place over the coming decade, with little prospect of seeing new segments such as corporate-affiliated retirement schemes enjoy significant growth.

The sovereign wealth funds and national pension schemes that dominate the scene now will probably be much bigger and more sophisticated in 10 years, said Templeton's Mr. Browning.

The big sovereign wealth funds will continue to get bigger and insource more as well, agreed James Chen, Manulife Asset Management's Hong Kong-based head of institutional sales, Asia.

But change can't be ruled out.

Predicting the big institutional investors now will get bigger is “the obvious conclusion if one just extrapolates from the present,” said Guan Ong, who founded Blue Rice Investment Management, Singapore, in 2009 after leaving his perch as the Korea Investment Corp.'s first chief investment officer. “The question we have to ask is what are the factors that will change the landscape” such as regulatory changes aimed at putting in place a more effective pension system, he said.

For example, the defined contribution-based enterprise annuity system China introduced roughly 10 years ago has accumulated only a modest US$70 billion in combined assets. Still, the right mix of tax incentives could lead to explosive growth, noted Stuart Leckie, the Hong Kong-based founder of pension consulting firm Stirling Finance.

Korea may prove the exception to what is otherwise justifiable pessimism about the prospects for a corporate focused “distributed pension provisions approach,” in line with recent government moves mandating the funding of corporate retirement schemes there, said Alan Schoenheimer, Russell Investments' Sydney-based chief executive, Asia-Pacific.

Meanwhile, insurance companies in the region will be “one of the fastest growing segments for asset management,” said Mark Konyn, CEO, Cathay Conning Asset Management, Hong Kong, formed two years ago by Conning & Co., Hartford, Conn., and Cathay Financial Holding Co., Taipei. In the past three years, the portion of Conning's $85 billion in AUM coming from Asia-Pacific clients has jumped to 10% from 2%, he said.

While it's unclear which institutional investment pools will develop, money management executives say they have faith that the region's capital markets will eventually catch up with its economy, leading to significant business opportunities over the medium to long term.

“We firmly believe that insurance companies and corporate retirement schemes will play a more significant role in the development of the institutional market in this region — similar to their counterparts in Europe and the U.S.,” said Andrew Lo, a Hong Kong-based senior managing director and CEO of Invesco Asia Pacific.

Even those who see continued consolidation and insourcing say they remain confident.

Singapore's more than $300 billion Government Investment Corp. is the grand old man of SWFs in the region at 30 years old, and is considered the template for the funds set up over the past decade. It outsources less than 20% of its assets, while the KIC outsources roughly 33% and the CIC, roughly 53%.

Other big investors, such as Malaysia's $170 billion Employees Provident Fund, are moving in the other direction, with the amount outsourced to external equity and bond managers rising to more than 10% of the portfolio in 2012, from 7% three years earlier.

Many big funds will continue to grow and continue to insource, but “I don't think the insourcing will be in excess of the pace of growth” assets, said Greg Cooper, Sydney-based CEO of Schroder Investment Management Australia Ltd. and head of Schroder's product development for Asia-Pacific.

Asia's institutional market today “is already good for us and it's going to get better, with an institutional base set to increase and diversify, even if a small number of institutions are likely to dominate the landscape for now, said UBS' Mr. Sotorp.

The threshold for competition is rising, but long-term players focused on execution will do just fine, he predicted.

There'll be opportunities, but with so many firms already competing, money managers must be clear about the value proposition they bring to the prospective institutional client, said Garry Hawker, a Singapore-based partner and head of consulting for Asia with Mercer.

With knowledge transfer at the center of relationships with institutional clients in the region, many money management executives see strategic partnerships as the key to succeeding.

The concept of strategic partnerships — forging broad relationships with big investors seeking to bolster their expertise in all areas of portfolio oversight and asset management — is the way in, said Nick Hoar, head of Asia-Pacific for Neuberger Berman Asia Ltd., Hong Kong. Those clients are “incredibly demanding,” but that just forces “us to improve our game,” which is essential to forming long lasting relationships here, he said.

The growing sophistication of Asia's institutional investors is opening opportunities for boutiques as well, said Paul Timlin, head of non-U.S. sales at Stone Harbor Investment Partners, London. The need to keep ahead of the curve has fueled Stone Harbor's progression from dollar-denominated emerging market sovereign strategies to local currency sovereigns and most recently to local currency emerging market credit, he said.

Industry veterans disagree about whether insourcing by big institutional investors in Asia will prove a secular trend or a cyclical one, which could reverse if an investor's internal team suffers poor performance or an operational slip. Either way, money management executives say they're confident they'll find opportunities to do business in the region.

Big clients in Asia are looking to learn from the money managers they hire. But even if they become experts at portfolio management, it's doubtful that many will want to make the investment needed to recreate the global reach of big asset management firms, said Victoria Shigehira Sharpe, a Singapore-based managing director with Prudential Financial's institutional relationship group.

“There'll always be room for us to do manufacturing,” and if we help them establish their portfolio management businesses, hopefully mandates will come when they need external help, she said.

And early birds could be better positioned in that fight, some argue.

In an environment where knowledge transfer and working on targeted solutions are key, “you have to be here now,” engaging with clients, said Bo Kratz, Northern Trust Corp.'s managing director for asset management in the Asia-Pacific region, Hong Kong.

A growing number of firms are putting teams in place now to forge those strategic relationships. Alan Harden, BNY Mellon Asset Management's Hong Kong-based CEO, Asia-Pacific, said his firm hired Mark Speciale earlier this month as its first head of Asia-Pacific institutional distribution, a job that will focus on expanding strategic partnerships in the region. Mr. Speciale had been Asia-Pacific head of sales and client service at Capital International Inc., now Capital Group. n