Coming investment boom not just for Asian managers

Local money managers in Asia will benefit as Asian investors come to account for an ever-larger slice of the global wealth pie, but big U.S. and European players could be poised to gain even more.

With greater wealth likely to be accompanied by a growing appetite for offshore investments, the scale those U.S. and European firms can bring to the Asia-Pacific region, together with their experience running multinational businesses, leave them better placed to gain assets for now, observers predict.

Market veterans say mergers and acquisitions might provide a short cut in obtaining global reach for a brave few — mostly China-based firms balancing a focus on fast-growing business opportunities at home with official encouragement to add overseas muscle.

For now, however, many analysts say it's tough to point to a local player in Asia's financial conglomerate-dominated asset management industry that looks set to scale the upper echelons of the global industry in the next five to 10 years.

The story of Asia's asset management industry is one of players with local market expertise struggling to become relevant outside of their home markets, in competition with global firms that have figured out how to run multinational businesses, said Joseph Ngai, a direct-or and managing partner of McKinsey & Co.'s Hong Kong practice, focused on Greater China financial institutions.

The latest Pensions & Investments/Towers Watson ranking of the world's 500 biggest asset managers, in terms of U.S. dollar-denominated assets under management, showed global U.S. and European heavyweights claiming the top 30 spots at year-end 2013.

In a Jan. 22 interview, Daniel Celeghin, Hong Kong-based partner and head of Asia-Pacific with money manager strategic consultant Casey Quirk & Associates, estimated local managers in Asia now oversee roughly US$7.5 trillion of the region's $10 trillion in externally managed assets, well under 15% of an estimated $58 trillion in externally managed assets globally. (All dollar figures in this story are U.S. dollars unless otherwise noted.)

Asked about likely trends, Mr. Celeghin said arguments can be made for the share of Asia-based managers to rise or fall in the future. But with foreign managers better placed to offer asset owners higher-margin strategies, a “safer assertion” is that local managers — absent a move up the risk-reward ladder by those firms — will see their share of money management industry fees decline.

Amid the rising profile of Asian investors, big global managers, with their broader capabilities, are in prime position to serve major institutional investors in the region, agreed Ian Martin, Sydney-based vice chairman, Asia-Pacific, with investment bank Berkshire Capital.

With so many Asia-based managers focused on their local markets, global managers “will get the main benefit from growth in Asia,” said Hwang Sung Taek, CEO and chief investment officer of Truston Asset Management, an independent Seoul-based firm with more than $14 billion in assets under management.

Analysts say that fact should leave the bulk of home-grown firms in the Asia-Pacific region looking to expand beyond their national borders. Local managers in China, where the domestic market's strong prospects make a parochial focus excusable, could be the exception.

Outside of China, the goal of “growing out of your own country is on the minds of everyone,” said McKinsey's Mr. Ngai.

Local players in the more mature markets of Asia, including Japan, Australia, Korea, Hong Kong and Taiwan, “had better be thinking about globalization in its two forms” — developing more global or regional strategies for domestic clients, and looking to “export” whatever products they can to offshore investors, said Casey Quirk's Mr. Celeghin.

Australian firms — with their leading role in sought-after asset segments such as infrastructure and real estate — are in a relatively strong position, said Mr. Celeghin. Asset managers in Japan or Korea face higher hurdles in building a global presence, he said.

Japanese asset managers and insurance companies have been on the prowl for targeted acquisitions in recent years, with analysts pointing to Tokyo-based Nikko Asset Management as the most aggressive in adding product capabilities and offices around the region.

In the broader region over the past half year, a number of local managers have worked — through acquisitions, liftouts or strategic alliances — to add more global heft to their operations, including:

• Taipei-based Cathay Financial Holding Co.'s November 2014 move to acquire Conning Holdings Corp., a Hartford, Conn.-based manager of insurance assets with AUM of $92 billion;


• Sydney-based AMP Ltd.'s October purchase of a 19.99% stake in China Life Pension Co. Ltd.; and


• Nikko Asset Management's Aug. 4 liftout of a six-member global equities team from Edinburgh-based Scottish Widows Investment Partnership.

For the most part, however, analysts say a local focus continues to constrain the growth of most asset managers in Asia.

“You can't be global unless you're really selling a global product,” said Justin Ong, Singapore-based asset management leader, Asia-Pacific, with PricewaterhouseCoopers LLP. Leading firms such as BlackRock Inc. and Templeton Asset Management Ltd. took years to build their global expertise, he added.

For a 2014 report on the likely evolution of the global asset management industry by 2020, Mr. Ong said his Asia-based team tried — but ultimately failed — to make a case for the rise of an “Asian Fidelity” over the coming decade.

“You can't become a serious global player without having a good-size U.S. presence and preferably some coverage in the U.K. and Japan,” noted Nick Gardiner, a Hong Kong-based partner and managing director with Boston Consulting Group's investment management practice.

Meanwhile, transformational M&A as a short cut to a global presence should prove “hard to see in any major way,” he said.

Investment bankers, who declined to be named, said a dearth of potential M&A deals now is making the asset management sector the ugly stepchild of Asia's financial sector. However, China could again prove an exception to that rule.

Several sources, while declining to be named, said China's life insurance companies are taking the lead in looking at potential acquisitions of overseas asset management capabilities — with some acquisitions likely to be announced within two or three years, if not earlier.

Some observers argue that China's big financial conglomerates, rather than its tightly regulated fund management companies, have managed to assemble a far more diverse lineup of asset management capabilities.

Focusing on the country's fund management companies amounts to “looking at the trees, and missing the forest behind them,” said Chengsen Yeh, a Shanghai-based director, asset management, China, with Ernst & Young Hua Ming LLP.

As continued reforms open the door for Chinese asset management businesses that can provide all types of investment products, the banks, trust and insurance companies — along with the fund management companies — will have an important role to play, he said.

Meanwhile, as a matter of national policy, those firms are being urged to consider strategies for international expansion, he added.

China could likewise prove an exception to the rule that the region is not fertile ground for independent money management firms — once again reflecting regulatory pressure.

While the number of boutiques that have grown to a few billion dollars in AUM is expanding, independent firms with more than $10 billion in AUM — including Truston and Value Partners, a Hong Kong Stock Exchange-listed firm with almost $13 billion — can be counted on one hand.

The China Securities Regulatory Commission, which oversees the country's 90 fund management companies, is focusing on corporate governance as a means of strengthening the money management industry, sources say. According to one, who declined to be identified, the CSRC is urging those firms to consider either a listing as a public company, like BlackRock, or a partnership structure, like The Capital Group.

That, and the sheer scale of China's economic growth, has left analysts predicting that global contenders will emerge among the country's asset managers, even if, at present, the biggest have less than $100 billion in AUM.

In a November report, Oliver Wyman predicted the combined AUM of China's fund management companies will surge to 24 trillion renminbi ($3.9 trillion) by 2020 from 4 trillion renminbi at the end of 2013, leaving market leaders closing in on the top 50 global asset managers in terms of AUM. “By 2030, we can expect they will be firmly in the global top 20,” the report concluded.

Toby Pittaway, a Singapore-based partner with Oliver Wyman and one of the report's authors, said in a telephone interview that the rapid growth of China's markets will be the principal factor boosting Chinese managers in the global rankings. But as China's capital markets open, moves to build out global businesses, by establishing or acquiring manufacturing capabilities in other major markets, could provide further momentum, he said.

For the rest of the region, even if big U.S. and European firms remain in the cat bird's seat for now, many observers still see a pathway to growth for local asset managers as well — in part due to cultural differences.

“The demands of Asian clients, be they institutional or high net worth, are often very different from what you find in developed markets,” and in many cases Asian asset managers will have some advantage in serving those clients, noted Manraj S. Sekhon, CEO and chief investment officer of Fullerton Fund Management Co. Ltd., a Singapore-based firm owned by sovereign wealth fund Temasek, with $11 billion in AUM.

For example, unlike a U.S. corporate or public pension fund, which invests with an acute awareness of its liability profile, many big institutional asset owners in Asia are hugely overendowed, which leaves them calibrating risk in a much different way, said Mr. Sekhon.

Meanwhile, with many investors in the region retaining some degree of home-market bias, the global equity and fixed-income products offered by leading global asset management firms might not be a perfect fit, he said.

“One size fits all doesn't work in Asia,” said Mr. Sekhon. Just as U.S. and U.K. asset managers grew to their current scale by providing specific solutions to various domestic client segments, a similar pattern will promote growth for Asia's asset management firms, he added.

For many asset managers in Asia looking to expand beyond their domestic markets, “regional equities has been the move,” noted Casey Quirk's Mr. Celeghin.

Seoul-based Truston became the latest firm to follow that strategy with the Dec. 30 launch of its pan-Asian, long-only Truston Asia Growth Equity Fund for retail and institutional investors. Mr. Hwang said the strategic goal is to build a track record that will position the firm for a broader set of business opportunities after three years or so.

Even so, there's still plenty of room to pursue domestic opportunities, said Mr. Hwang. For example, Truston is benefiting from recent moves by Korea's government to strengthen the country's corporate pension system — a segment that, while it accounts now for a modest $100 million of Truston's business, could grow at an annual pace of 100%, he said.

Other analysts in the region point to the growing importance of sizable local asset segments where Asian players could enjoy a competitive advantage.

For example, local currency fixed income in the region — which the Asian Development Bank pegged at $8.2 trillion for emerging east Asia as of Sept. 30 — could provide a big opportunity to local players, especially with the eventual opening of China's capital markets, noted Simon Coxeter, a Singapore-based principal with Mercer. Currently, competition for veteran credit analysts in Asia is fierce, while the prevalence of insurance company-owned asset managers with deep fixed-income capabilities could prove an advantage, he said.

Similarly, some market veterans argue the home-court advantage for local managers in China's fast growing but considerably inefficient capital markets should likewise come to the fore as capital market reforms pave the way for a more diverse range of products in the coming years.

The “unique characteristics” of the market should give top-10 fund management companies with considerable “local expertise,” such as Guangzhou-based GF Funds, a competitive edge over the big global players. The advantage should persist for the next five or 10 years, said Sharon Yang, director of institutional sales with Hong Kong-based GF International Investment Management Ltd.

Meanwhile, Mark Brugner, the Hong Kong-based head of manager research in Asia with consulting firm Towers Watson, said while big global players could be poised to dominate Asia's institutional investor marketplace, local managers should find much better opportunities serving the region's growing retail market. At the end of the day, however, the development of a sizable independent asset manager segment could depend on decisions by financial conglomerates in the region, perhaps due to regulatory pressure, to hive off their asset management arms.

Casey Quirk's Mr. Celeghin said a growing recognition that banks and insurance companies aren't the best owners for asset management businesses could promote that outcome. n