June 2017

FUNDFORUM ROUND-UP: Making connections

Hong_Kong_at_sunsetFundForum Asia saw delegates discuss a range of issues affecting the funds industry, such as regulation, exchange-traded funds and digital disruption. George Mitton reports. The JW Marriott hotel in Hong Kong has for several years been the venue of FundForum Asia, perhaps the best-attended conference for the cross-border funds industry in the region. This year’s event attracted attendees from across the industry: asset managers, custody banks, fund administrations, institutional investors and others. As always, there were difficult questions to discuss. How will asset managers protect their profit margins in an environment where passive investments such as exchange-traded funds (ETFs) are putting downward pressure on fees? What are the prospects of a meaningful Asian passporting scheme given that registrations under Hong Kong’s mutual recognition of funds (MRF) programme with mainland China seems to have stalled? Senior executives at the conference had plenty to talk about as these issues were unpacked and dissected. Tough talk
One of the most provocative speakers made an appearance early in the conference. Andy Agathangelou, chair of the Transparency Task Force, a UK-based organisation pushing for greater transparency in financial services, argued that “the asset management industry has failed to manage its single most important asset, its reputation”. The failure of asset managers to inspire trust in their customers has caused historically low savings rates in Europe, he said. Asian investors would be similarly deterred from buying funds if the industry could not improve its reputation. Particularly vulnerable are providers of actively managed funds, he said, which are “in crisis” due to the large sums of money being redeployed from active funds into ETFs and other passive products. A fundamental change in the way the industry prices its services may be necessary, he warned. “Organisations that are able to demonstrate a true alignment of interests with clients will succeed,” he said. “It’s difficult to demonstrate alignment with an AMC [annual management charge] model. AMC is going to be a thing of the past in its simple terms. It may take years but I think we’ll see a radical shift towards those models with an alignment-of-interests approach.” Fragments
Following this warning, representatives from some of the biggest global managers in Asia sat down to discuss practical matters. Lieven Debruyne, Asia-Pacific chief executive at Schroders, said the focus had to be on providing services for retirement – an especially pressing need in the numerous Asian countries with rapidly ageing populations. “As the Asian middle class gets wealthier, they need to invest for retirement,” he said. “To do so well, we need to step up. It’s not all about what and how we charge, it’s about how we provide a good service.” Also on the panel was Michael Falcon, Debruyne’s opposite number at JP Morgan Asset Management. A former head of retirement services at his firm in the US, he shared a belief that pensions should be central to an Asian strategy. The key, he said, was to provide the right outcomes to investors: “It’s going to be less about having a performing product and more about having that fit in a portfolio that is outcome-driven.” The panel admitted some uncertainty about the future direction of Asia’s cross-border funds industry. Falcon said he was “not optimistic” about regional fund passporting schemes, such as the Asia Region Funds Passport. His reasoning was familiar: unlike Europe, Asia today is simply too fragmented to allow such initiatives to prosper. “Asia is a place and not a thing,” he said. “Europe, for now, is still a thing.” His comments garnered muted agreement from the audience. However, Debruyne sought to moderate what might have seemed a pessimistic view. “Yes, Asia is fragmented,” he said, “but there’s a lot of commonality which does warrant a regional approach.” Regulator
One of the laudable things about Hong Kong’s regulators is that they are generally willing to put themselves up for questioning. Christina Choi, executive director of investment products at the Securities and Futures Commission, demonstrated this by taking questions from the audience later in the day. Stewart Aldcroft, a veteran of Hong Kong’s asset management industry and currently a senior adviser to Citi, put her on the spot. Why, he said, has the proportion of Hong Kong residents who invest in funds fallen from 10% in 1999 to a level, he estimates, of about 5%? Aware that such a trend, if true, would reflect poorly on a regulator that aims to promote and foster a domestic asset management industry, Choi responded by questioning the data. “I have reservations about the statistics you’ve got,” she replied. “Assets have grown. We’re seeing increasing investments in ETFs, for example.” She also remarked that assets in the Mandatory Provident Fund, Hong Kong’s compulsory savings scheme, had risen. “We know that Hong Kong investors have a lot of choices compared to other markets,” she said. ETF-proof
Later in the conference, the commercial challenges facing asset management businesses were laid bare by an expert on the subject. Daniel Celeghin, head of Asia-Pacific at consultancy Casey Quirk, is a regular adviser to chief executives in the industry and has a wealth of pertinent advice on how to stay relevant in a fast-changing industry. A major problem for asset managers, he says, is that margins are under pressure. In this environment, it is important to identify which lines of business are profitable and defensible, and concentrate on those. “How many of you have expensive hobbies?” he asked, meaning investment capabilities in asset classes that were not central to the firm’s strategy. His message was not only to focus on one’s strengths, but also to find strengths that are immune from attack from elsewhere in the industry. “Investment leadership is good,” he said. “Investment leadership in an asset class that is not ETF-able is even better.” Specific to Asia, his advice was that local fund structures are becoming more important for serious pan-Asian players. It is a message that proponents of cross-border fund investing did not particularly like to hear, but his data and experience back it up. “There was an illusion of getting leverage by selling repackaged European Ucits in Asia, but those days are gone,” he said. “The real growth is all in local structures, and I say that knowing how difficult it can be to pick a market and go under the umbrella of the local regulators.” Connect
That said, there is at least one place where cross-border activity is keenly watched. ETF Connect, an extension of the Stock Connect scheme that links the Hong Kong stock exchange with Shanghai and Shenzhen, is anticipated soon. Brian Roberts, head of exchange-traded products at Hong Kong Exchanges and Clearing, was questioned on the point, but warned that investors may have to wait until next year before the scheme goes live. The reason is that there is a significant amount work still to do to harmonise settlement processes for northbound ETFs – Hong Kong-listed ETFs bought or sold by mainland Chinese investors. “Will it happen this year?” he said. “It’s something we’re working towards. But time, right now, is something we’re running out of, in terms of the sheer development needed to reconcile the two settlement systems. “We do want to get it out there but we want to get the best product out there initially. It’s harder to enhance [such products] once they’re out, so we want to make sure we can get the most optimal product out there on day one.” As usual, FundForum Asia provided a lively forum for debate on the issues facing the industry. There are many challenges ahead, but with developments such as ETF Connect on the horizon, there is plenty to look forward to. 2017 funds global asia

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