Panellists discuss expanding product capability across Asia-Pacific, the opportunities and regulatory challenges around data and the prospects for ETFs in the region. Chaired by Romil Patel in Hong Kong.
(head of products, investments and fund services – APAC, BNP Paribas Securities Services)Betty Zhou
(head of business development, Caceis Hong Kong)Stewart Aldcroft
(senior adviser, markets and securities services – APAC, Citi)Alessandro Silvestro
(managing director – Asia-Pacific, Lemanik)Caroline Higgins
(head of global fund services – Asia, Northern Trust)
Funds Global – What has been your major preoccupation over the past 12 months?
Stewart Aldcroft, Citi –
I have spent a lot of time talking to fund manager clients about market entry to Asia, China and the ETF market. We have moved on with a lot of our Request for Proposal (RFP) work with clients looking to create new products, or clients wanting to add to products or looking to change provider. I’ve met with the regulators in China, Hong Kong, Singapore, Malaysia and Thailand, sharing views on funds passporting, fund and ETF developments. It has been a much busier time than expected – we’ve onboarded new clients, offloaded old clients and that continues.
Remi Toucheboeuf, BNP Paribas –
We have been expanding our product capability and enhancing our service offering across Asia-Pacific. Similarly, we have had discussions regarding ETFs with clients across the region as we see significant developments and change happening in the region at present.
We also have digital initiatives underway, and I’m coming at that from an Asian perspective. China is very active in that space and we are having conversations with clients who have high expectations from their service providers in terms of new solutions and digital support. We are engaged in co-design projects with several clients. Regulations always keep us busy, as this is our area of expertise, but we have seen even more changes this past year.
Betty Zhou, Caceis –
The current unrest – Brexit, trade wars and everything else – add pressure to our clients, who are fund managers. Therefore, they have to adjust their investment strategies and as a result of this, we get a lot of requirements from them, such as helping them to adapt to this ever-changing environment, in terms of fund structuring and also operational model.
A key focus of mine this year is helping Asian clients to better integrate into international practice. Part II funds are having a possible comeback in this region lately, especially among Chinese communities. The reason is because at the beginning of this year, the Chinese government only allowed those state-owned companies to have their overseas investment go to a well-regulated public fund, and also on top of that, it has to have a very good level of investor protection with a more flexible strategy. All this has created opportunities for European fund products. We did get a lot of requirement from Asian fund managers because the whole European product is still relatively new for them.
Alessandro Silvestro, Lemanik –
Lemanik expanded in a couple of countries in 2018, and Asia was a key element of our group strategy. When I opened the office one year ago, our assets under management (AuM) based in Asia represented 20%, so there was already a significant client base here, which is why we opened the office. Since then, we have been focusing on demonstrating unique values to our clients – servicing them in their time zone, where we share our consultative approach and expertise.
Caroline Higgins, Northern Trust –
The focus has increasingly shifted away from regulation and there is more focus on what’s evolving in the market and where our clients are placed, or where they have challenges. There are a lot of conversations about Stock Connect, Bond Connect, opportunities in China and some of the newer fund structures that are coming to Singapore and Hong Kong, over what to do with these versus Ucits, existing fund ranges and alternatives.
People have time to step back now and focus more on their product offerings, and our clients are increasing complexity within their products and looking to see how they can futureproof them. There are more conversations around how outsourcing could assist, and we’re seeing a shift away from just presenting solutions to our clients, to considering their aims, objectives and challenges, and increasingly taking a consultative view with them. We are definitely seeing more opportunities within the middle-office space, and also around the front-office solutions such as trade execution and brokerage. There is always a focus on technology and the question of how we adapt to that and integrate that into our business – now and in the future.
Funds Global – Looking at the cross-border fund flows with China, how is the mutual recognition of funds working out, and what’s your outlook over the coming months?
Starting with the Mutual Recognition of Funds (MRF) with China, about 20 funds are acceptable in China from Hong Kong and 50 funds from China are accepted in Hong Kong. In terms of fund flows, we’ve seen about $2 billion come south and about $100 million go north, so there’s a big disparity there. But after a period towards the end of last year where it seemed to slow down very rapidly, the first six months of this year have seen it pick up quite sharply, and a couple of months have seen some very good volumes (for southbound flows). Volumes are still very heavily going into just two or three funds, and many of the 20 are getting next to nothing, so it’s still very focused.
What’s the opportunity? The upside of course remains enormous, the demands in China are very high, and the reality is that the China Securities Regulatory Commission (CSRC) has been very slow in allowing more Hong Kong funds into the market. Of course, that has not helped a great deal because this is a market where competition would actually improve the volumes. This year MRF funds have been allowed to be included in mainland China fund-of-fund pension products, which is a good move.
To what extent there will be a big volume in that is very hard to tell because I don’t think anybody has actually done some, or if they have, it’s negligible. However, we will still see that the MRF between Hong Kong and China – of the three passporting schemes within the region – is far and away the most successful, and the other two for the Association of Southeast Asian Nations (Asean) and the Asia Region Funds Passport (ARFP) are just a complete waste of time.
Funds Global – Which are the handful of funds that are being focused on?
JP Morgan have had most of the money – probably around 70% of all the volume. Schroders, Zeal and the Bank of East Asia have had a little bit. Part of the problem is who can you get as your marketing and distribution partner? If you don’t have one, it’s a struggle. One of the aspects of the whole MRF issue is that for those people in China who have an interest to invest internationally, many of them have already got their money out of the country and are being very active in using Hong Kong funds via their private bank or bank relationship here. That has been a massive source of new clients and of AuM for the industry over the last five or six years. It slowed down a little bit when China started to exert stronger exchange controls, but mainlanders are still doing whatever they can to get money out of China, and once they’ve got it out, they have no interest in using that same money to invest back into China. They are investing it across the rest of the world in high yield products and emerging markets and regional products, and even some more traditional equity markets have been on their platforms, but everything has stopped since about the end of May.
I totally agree with Stewart. The north and south funds are having very different turnout, for example the south fund is only 5% of the north compared with the total volume. One of the reasons is because the connectivity which is provided by the southern funds is no longer an exclusive advantage given that the Bond Connect and the Stock Connect are already giving similar connectivity to both Hong Kong funds and funds from other jurisdictions. For the northern funds, the regulatory approval process is a big problem that’s dragging, but it has sped up lately.
Apart from the distribution, another reason is the connectivity that they offer for getting into the Hong Kong market, and on top of that, more importantly is the scope of the investment. It not only offers investing into Hong Kong funds, it also has a wider range of investments in terms of the market and the instruments, that’s why the north is more popular compared with the south. Also, until last month the Securities and Futures Commission (SFC) had this MRF memorandum of understanding with France, Luxembourg, Switzerland, the Netherlands and the UK. It is too early and therefore optimistic to say right now that it will give a fund passporting feature to Hong Kong funds, but some of our clients who are big European players are considering launching a Hong Kong fund, because they are big in Europe so they can still leverage their capacity there. On the other hand, they can use Hong Kong funds to tap into the China onshore market, which is still an exclusive feature for Hong Kong funds.
The MRF between Hong Kong and China makes sense only if the volumes are high. Then obviously the other MRFs initiatives that Hong Kong has signed so far (Luxembourg, UK and the Netherlands, for instance) could push investors to set up a Hong Kong-domiciled fund as a bridge to China. In parallel, the fund associations of Luxembourg and Ireland are also discussing direct fund partnerships with China. Such an agreement would definitely simplify the distribution models.
Our global and regional fund management clients are stepping back and looking at their products and fund ranges. They are saying: “I can get what I need by using Ucits, or in this market I might have a local or feeder fund structure.” It’s also how managers can set up the type of vehicles or fund structures that are needed to participate in these schemes. It’s not cost-effective and it means more regulations to manage different funds in different locations. So, whilst there is great interest in China and some other emerging countries in southeast Asia, clients will generally return to what they have today and ask if they can utilise those fund structures, usually Ucits or an existing local fund structure. They will then consider the approach per market, mainly regarding China.
Funds Global – How well do you think the industry is getting to grips with data and data services?
Service providers store and use an immense amount of data on a daily basis. People always talk about the huge potential within that and there are a lot of opportunities, particularly for clients and asset managers looking for service providers or vendors who can aggregate the data and actually help them use it. There are a lot of questions around security and quality of the data, so while there are a lot of opportunities, there are also a lot of challenges in terms of regulation.
Who owns the data and how is it used? Most of our clients would be using it on a global scale and what needs to be considered is not just where the manager is, but where that data is going to be taken and used. There are a lot of questions surrounding who owns the data, who’s accountable for it and how it’s used. There are also a lot of conversations in all organisations around how that data is accessed.
How data is deployed is very much in its infancy, but there are discussions about the ownership and accountability of data, and some of those debates have come to the surface on the back of regulations such as GDPR. The biggest question currently is who is the owner, the controller and the user of the data?
When clients receive the data, they must know how to use it effectively because there is a large quantity of it. It comes down to regulations and how you deliver it, and then having the tools or the experience within an asset manager’s firm to be able to customise it so that the data is meaningful to the asset manager.
There are many opportunities, but they are difficult to grab because there are a lot of data providers, data analysts and GDPR is an additional challenge. I think data services will benefit if we see it as a tool to increase knowledge of the market and provide better information in order to make faster decisions. We need to find a way for data services to be developed that way and not as a stress to privacy, so this is how data can create value.
The industry has not yet fully embraced all of these concepts and some of the players are still trying to understand how to put themselves in the field to get things up and running. The whole industry is focusing on fund servicing – it is more of a service provider or a bank, and the concept of data and data servicing has caused a rethink around the business model. Rather than thinking like a depositor bank, it is good to think like a fintech company that is focused on delivering a better experience. This is all about cultural transformation.
Another thing is around data accessibility. The client must also benefit from the economies of scale when we pick up big data technology, and this is all about the open banking architecture we’re moving into.
There is a general consensus that this technology requires us to completely transform the industry in the coming years. Most of our institutional investor clients are eager to do more on that side, but they don’t have the in-house knowledge or the budget to invest. Naturally what they then do is look for a partner or service provider, and that’s where we have been stepping in. The way we look at that is potentially to improve the level of automation of our operational process as well as the way we deliver our advanced reporting, because with this kind of technology, you can do much more with your clients in terms of connectivity and data feeds.
We also see an opportunity to provide clients with many more data points for them to perform in-depth analysis; and data analysis becomes particularly interesting when it comes to distribution in Asia-Pacific (APAC). Our clients want to know what’s happening in the different markets where they have a local presence. They want to really understand the positioning of their fund versus the rest of the competition, or to understand the new strategies interesting investors, and data services technologies can help.
As our clients’ business models change, we see opportunity because we will be able to provide added-value services on top of our core services. We need to move quickly, and the technological approach BNP Paribas is taking is to partner with agile fintechs.
Funds Global – How has MiFID II impacted the industry in Hong Kong?
The MiFID directive has two main objectives: to increase competition and to enhance investor protection. The main impacts are at two levels: one at the distributor level, and the second one at the asset management level, as they have to disclose how much fees are paid to the broker for the trade execution and how much fees are paid for the advice. This relationship, which has dramatically changed in Europe between the broker and the client, is slowly changing in Asia and the US. The other impact, which was at distributor level, hasn’t had any impact in Asia unless the client had distribution in Europe.
I agree, it is totally Europe-driven, and as such, was not mandated to be taken on board in Asia. However, given a lot of firms within Hong Kong and Singapore have a European parental base, more of this has become best practice.
Organisations are now more focused on transparency and the best trade execution. This is opening up opportunities for those that can deliver services based around transparency and best practice.
Hong Kong or Singapore is an international management centre, so it will have a significant change and it’s starting to roll out, but it is not as radical a change as people expected.
What we have mainly done is education, because when some of our clients are interested in distributing into Europe or to engage with European counterparties, that’s where the impact is coming from, but everyone is waiting for the next step.
Funds Global – We’ve seen considerable growth in private markets, asset classes, infrastructure, private credit, private equity and so on. How have you seen this grow in Asia, and do you think it will continue to grow? What areas of the business do you think will become more efficient as we go forward?
It’s complicated because as we’ve seen the returns from traditional investments decline quite sharply, bank deposit rates close to zero, and more money coming into people’s wealth and going into private banks, private banks have had to go out of their way to find new ways in which to invest that money. Increasingly they are not wanting to use traditional investment products. They’re trying to do things differently from their retail or consumer bank cousins and subsidiaries, so that’s why they’ve gone down many different private investment routes. The best example of this is what has gone on in China, which in five, six years has seen private investment funds grow from not very much to over $6 trillion – that’s three times the size of the regulated funds industry, and still growing faster, so, there are massive flows.
Where is the money going? It’s going into the usual hedge and alternatives and property and club investments and private equity vehicles, among other things. What’s noticeable is that as the volumes go into private equity, there’s very little demonstration that these are going to do that much better than the traditional funds that would have been the alternatives. Sometimes it’s because the private banks that are doing the advice on this are being paid more to sell these products than would be the case if they were selling traditional products. They can claim that they are justifying their inflated fees to sell these things, and that’s probably not a very good thing.
By 2020, PwC is expecting alternative assets to stand at $15.3 trillion, mostly based in Europe and the US. However, Asia-Pacific is going to be a significant source of growth going forward. Mainly because of diversification reasons from the sovereign funds, superannuation funds as well as the need for higher yield. So, what does it mean from our perspective? There would be a need for some tailored solutions, and when it comes to an alternative, it’s always a bit more complicated. Ultimately, I think our clients will expand more on illiquid assets and alternative assets instead of pure liquid.
I like to use Japan as an example because it has a long history of using pension funds to generate retirement benefits. Also, the Japanese government has seen this opportunity coming from alternatives and they have almost double digits of return. That’s why they already changed the regulation to allow 5% of the total pension funds to invest into alternatives for a more long-term sustainable return. Alternative funds always provide more flexibility in terms of the investment strategy and also the diversification, and it is still subject to a certain regulatory framework, that’s why it becomes more and more popular.
I am convinced it will continue to grow, as shown in your survey last year. Alternatives are here to stay, even though we are probably at the peak from a valuation perspective, but the best opportunities and investments are here in Asia-Pacific. At a global level, it’s interesting to note that the US, which is an ultra-regulated market, is looking at how to sell private equity funds to retail investors. These are high-risk funds and they are exploring which methodology would add a little bit more liquidity.
In terms of efficiency going forward, smaller-service, innovative models that surround alternatives e.g. private equity, are more ideal for testing technology such as blockchain because it is a very defined market. We have just sold our blockchain private equity technology so it can become more of a utility for the wider market. Alternatives provide specific challenges and the scale is small to go in and test some of these future technologies.
Funds Global – Is ETF servicing likely to grow in the region?
ETFs are definitely going to grow. Looking at it from a pure snapshot perspective, it has been disappointing, with more delisting of funds than creation. Looking forward, the trend is going to be different because both retail and institutional investors are interested in lower-fee products like ETFs. Perhaps the demand has been low because the banks, as the main distribution channels for ETFs, have less incentive to promote these lower-fee-generating products. There will also be a lot of innovation in terms of pure passive, so going through different thematics and moving away from the traditional indexes to look for something innovative. We anticipate more active ETFs with adjusted strategies suitable for the region, so it’s going to be a growing area of development.
The ETF business is stuck in a little vortex of its own at the moment. Hong Kong and Singapore are seeing negligible retail business, Taiwan has seen massive growth entirely from one sector – the insurance companies, and Korea, Japan and Australia have seen big business growth. Malaysia and Thailand would both like to create their own ETF centres. But none of this is going to happen if we don’t start to see a lot more retail money coming into that business. Right now, up to 98% of all the money flows we see through capital introduction has gone to US or European-listed ETFs because the ones in Asia are too small to take $100 million tickets. Often their fees are too high relative to their European and American counterparts, and so it’s a struggle. How will that change? We’re having extensive discussions with the Hong Kong Exchange at the moment on this, because they too want to see a change.
There could be ETF Connect to China, that’s possibly going to happen before the end of the year. It’s been talked about for at least three years but most of the administrative roadblocks have now been removed, so it’s just a matter of getting that sorted. If the ETF Connect does launch, that will lead to big interest to create more ETF products in Hong Kong, and that gives the opportunity to do more. So, there need to be some structural and positive regulatory changes. Taiwan is a good example after going from a $5 billion market just two or three years ago to a $40 billion market now, with ten ETF providers and approximately 120 ETFs. Taiwan will very quickly pass Hong Kong in size at this rate, it’s already passed Korea and is still growing.
Funds Global – Looking at asset servicing, do you see more harmonisation of regulation or do you anticipate more local regulation?
The whole industry will probably take a more regulated approach to enhance their transparency and risk management. Also, for the local government, they are trying to tighten up the whole control in order to protect and promote the local product. Regulatory control has been slowing down in general, but the industry is still busy complying with the current ones and also trying to pick up the speed with the upcoming ones.
Toucheboeuf – We are likely to witness continued complexity for the industry over the coming years due to the impact of more global regulations. Phase 5 and now phase 6 of the Seg IM regulation will impact more buy-side institutions in Asia, so they will need a solution to manage the global requirements and continue trading on over-the-counter (OTC) derivatives. Implementation and adaptation to these regulations will require effort and investment from the financial institutions. And critically, only a few asset service providers can globally cater for such offerings.
On the other side, more local regulations are taking place to support the growth of emerging markets. In China, regulations are changing very quickly with the opening of the market and given the speed of change and its complexity, you need to be very agile.
In Hong Kong, the chief executive of the Hong Kong SFC has also been chairman of the International Organization of Securities Commissions (IOSCO). IOSCO’s role is to try to get global harmony on regulation and therefore the SFC has been leading the charge to try to do that, but amongst the different regulators around the region, there’s little or no intent on their part. Most of them feel that they’re so far behind anyway, why should they try to catch up?
I agree with Stewart’s comments on gaining harmonisation within the region. Regulators are also facing challenges regarding new technologies, on how they opine on those technologies. So, for providers and lenders that work across multiple jurisdictions or countries within Asia, the challenge is when each of those countries and regulators look at data and technology in different ways.
In Europe it’s quite easy to make harmonised legislation because there is one regulator, so for instance they just released a new legislation that will enter into force in 2021. It’s about harmonised marketing rules in Europe, reverse solicitation and product placement, so one regulator is very easy – they send a directive and give three years to implement it. In Asia, every country has their own way to do it, so I do not think that we will see full harmonisation from a local perspective.
Funds Global – What’s on your radar for the next two years and what are your priorities?
The first will be to secure a leading position as a management company of reference here in Asia-Pacific for Luxembourg and Irish funds. The second will be to increase the synergies between the businesses of Lemanik Group, and the third is to monitor opportunities in the region and perhaps open new offices.
In terms of the market, we will continue to see more product development to support renminbi internationalisation, given what happened between China and the US. Under this sentiment we will also see people seeking different investment strategies and investment opportunities outside traditional investment funds. As a European servicing bank in Asia, we are doing our best to help our clients to capture this opportunity and take their business to the next level.
Our first priority is to strengthen and reinforce our position in cross-border distribution in Asia-Pacific, adding to our strength in Europe. For instance, combining MRF opportunity or passporting development with the development of the new corporate structures in Singapore and Hong Kong. This will represent a significant opportunity for fund managers to establish broader distribution in APAC. Secondly, to leverage our digital transformation and continue our co-design approach with clients where we are developing new business models and facilitating their expansion into the region. The final one is to provide strategic and flexible solutions for our middle-office clients.
Within Citi there’s an ongoing desire to merge as many businesses into one. We just announced another merger of the equities business with markets and securities services, so there’s always this consolidation going on. Within the funds services business, in Hong Kong specifically but also within the region, we’ve got three principal business lines which are ETFs, MPF pension funds and traditional funds, and our major effort has always been to make clients more profitable and that’s where we spend most of our time and effort.
We do see an increasing trend in outsourcing in Asia, particularly around the middle-office space, not only for asset managers but also in the asset owner segment for some southeast Asian countries. Technology is a big focus for us right now and will continue to be over the next couple of years. We’re implementing a strategic operating model with the first few phases focused on our transfer agency and fund accounting, so managing our business as usual as we transform into a new strategic operating model will allow us to bring forward technology such as application programming interfaces (APIs) and data management. Management and preparation for the future will keep us busy.
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