Our cross-industry panel discussed fintech, the costly burden of compliance, and what fund managers can learn from airlines. Chaired by George Mitton in Singapore. Patrick Corfe (marketing director, Aberdeen Asset Management)
Madhu Gayer (head of Asia Pacific investment reporting & performance, BNP Paribas Securities Services)
N. Murali (chief investment officer, UTI International)
Justin Ong (partner, asset and wealth management industry leader, Asia-Pacific, PwC)
Alex Zeeh (chief executive, SEA Asset Management) Funds Global: What are the opportunities and challenges associated with financial technology, or ‘fintech’, in Asia? Justin Ong, PwC: Fintech is a broad term and a lot of people have difficulty understanding what it means. In fact, a lot of what we do today goes beyond financial technology and into other areas such as legal or regulatory technology. Technology in itself will make a big impression on the funds industry, however in Asia we’ve not seen the impact yet, with perhaps the exception of China. Madhu Gayer, BNP Paribas Securities Services: There is a digital revolution occurring within the industry. Firms like ours are asking, how does fintech or digital help us offer a better experience to clients? Part of the issue is that with this new world, agility and a cultural mind shift is important to be able to deliver digital solutions to our clients. As a consequence, BNP have an innovation lab set up globally, and as well in Singapore. The lab is responsible for incubation of ideas, co-innovation, developing apps to further the digital experience, with joint user testing with certain key clients to ensure that the client experience is embedded at the heart of the solutions we are developing. Patrick Corfe, Aberdeen Asset Management: I think fintech has been overhyped. As regards robo-advisers, there’s this idea that they will disintermediate the wholesaler. That’s unlikely. In the West, where fintech is more developed, a lot of the so-called fintech companies don’t make money. The reason is that owning the consumers is extremely expensive. It’s a fantasy to think that as a fintech company you’re going to get your advisory licence, get rid of your due diligence and all that know-your-client baggage, for instance. Our view on fintech is that’s it’s not going to replace the conventional advisory business. Where it will be ground-breaking is in its brute crunching power and its algorithmic ability to make advice easier. But robo-advice will be an accessory to the advisers and the advisers will still own the clients. Alex Zeeh, SEA Asset Management: I agree in terms of compliance. If the robo-adviser gives a client the wrong advice, who are clients going to sue? Perhaps you can push a button and it will give you the algorithm that came to the conclusion that you should make the bad investment, but is that sufficient? It seems the consumer is not protected any more. N. Murali, UTI International: In terms of robo-advice, it is predicted that by 2030, half of assets under management will belong to the millennials. These guys tend to be very self-directed. They think they can get better returns by themselves. They want to use a do-it-yourself approach, and the traditional asset management industry has to cope with that. Earnings are bound to be affected because millennials have an issue with the kind of fees that the fund management industry is charging. We can’t run away from this, but I think there is an opportunity to benefit from this trend. Corfe: I think millennials are one of the great distractions at the moment because they don’t have any money and they don’t invest. There’s a presumption they’ll inherit money or whatever, but for now, they’re all living off their parents or grandparents. Ong: Yes, but the question is how do you engage millennials now to make sure that when they become income earners, they remember your platform and use it? Another point is that fintech may be more effective in countries where you have huge populations, where you’re not going to be able to give advice in every part of the country, such as China, India and Indonesia. You can get advice anywhere in Singapore, but in these other places you need a wide reach. The question about wealth is interesting. If you can create a product that accepts smaller denominations, one rupee or one renminbi for instance, then you create a different environment altogether that allows customers to save $5 a day or $5 a month. Corfe: Your point is well made about mass market, but, as product manufacturers, we know that the cost of compliance is a burden. I’m not sure supermarket-style selling, at a super-low cost, is possible. But back to the first point about Google and so on, one possible left-field development could be a big airline or retailer using their massive consumer database and marrying that with fintech. They must ask themselves, why shouldn’t we go into this business? Sweating that consumer data must be very tempting. Gayer: That ‘big data’ idea has a lot of potential. Tying in data that previously has not been accessible is at least worth consideration, to understand if traditional sources for informed decision-making can be improved. For example, we’ve even seen fund managers mining social media such as LinkedIn and Facebook in their quantitative strategies to augment traditional sources such as employment figures released by statistical bureaus to check for broad trends. The individual data point is not as important as the ability to spot a trend. This goes back to the point around cultural change. If you look at India, for example, the average age of the population is low. They all want access to new technologies and new markets. They don’t want to go to a bank and spend ten hours in a queue to ask a question. They want the information on their tablet or their iPhone. An important and growing part of this digital world is also peer-sourced recommendations, to validate their choices, which you cannot do as easily in the traditional world. Corfe: I suppose the question with fintech is, at what point is it attractive for the funds industry to stop pursuing a narrow stratum of urban well-to-do people and go out after the mass market? Gayer: I think you have to start sowing the seeds now. You can’t keep on saying, “They will come, they will come.” That culture and trust has to be established. But it is a long play, even out to 15 years, so people can’t expect a return on investment in three or six months. Funds Global: Alex, as a small, boutique asset manager, how much will fintech affect you? Zeeh: It will not change our business model at all. We are too small for this to make an impact for us. Also, for us to get into any of this, it would probably require an investment which we couldn’t make. As a boutique firm, we aim to customise and tailor-make products and services. The segment we are targeting are the individuals or the entities that want that. I can’t robo-advise them. In general, I think the term ‘fintech’ has been overhyped. That said, I do not think it will go away. The situation reminds me of the internet bubble in 2001. When that burst, the majority of internet companies went bust, but the ones that survived, Amazon and eBay for instance, are huge companies now and have become main competitors for traditional retailers. Countless bookstores and traditional retail chains have who ignored their rise have gone out of business. It reminds me a bit of airlines, too. Airlines never wanted to go after the low-cost, short-haul customers. They thought there was no money to be made, but now we see they missed an opportunity. The low-cost carriers have taken this share of the market and flagship carriers are struggling to regain this now lost segment of market share. Margin pressure makes this ever more painful. Corfe: But I would say there’s a bigger cautionary tale here, and that is that if you look at airlines in Asia, almost without exception, none of them make good money. The analogy in fintech is that there are a lot of new entrants coming in and they’re all competing and shaving margin off each other, which is why very few make money. Zeeh: That’s why I want to know, will fintech enhance margins or lower them? These new entrants can steal market share because they are willing to operate on lower margins or even lose money for a number of years. As a result, fintech may end up reducing margins across the industry. Corfe: One last point. In Asia, the route to the mass market will probably be through the insurance industry.  The way people buy financial products here is that they buy insurance first, including things like ILPs [investment linked policies] that we don’t really have in the West. Murali: I think that route will certainly be exploited in China because there are so many people there who are uninsured. It’s a huge mass market to go after. Funds Global: How would you describe your clients’ risk appetite at the moment? After the volatility in China and elsewhere in recent months, do you see a possible comeback for risk assets in the region? Murali: We have seen an increased appetite for bond funds. Given the negative interest rates in the developed world and limited return potential in many of the places like the US, the slight pick-up of risk appetite we have seen is more focused on emerging market bonds rather than equities. Zeeh: Same. We have a bond and an equity fund. It’s difficult to sell an Asian equity fund outside of Asia at the moment. European risk appetite is lukewarm. It may be that European investors still have a hangover from last year’s volatility in terms of Asia. However, we like Asian high yield bonds. Corfe: These are extraordinary times – sustained quantitative easing, financial oppression, bonds and equities at all-time highs. You’ve got perversities of people buying bonds for capital appreciation, buying equities for yield. You can’t price capital properly. The consequence is massive misallocation. It’s a very difficult environment and it’s difficult to convince oneself on anything other than on a five to ten-year view. And how many clients honestly invest for a five to ten-year period? Ong: People are obviously looking for new ideas, but they’re still looking for diversification of asset classes. There is interest in alternatives, not hedge funds but private equity, real estate and infrastructure. Take, for example, the recent launch of a half-a-billion-dollar fund of private equity funds here in Singapore. This shows demand for risk assets, though not traditional ones. Gayer: There is definitely more focus on risk from the institutional clients I deal with, pension funds and so on. I’ve got large institutional clients coming to me and saying they want to understand risk budgeting. They want to be able to do scenario analysis, to try their own scenarios, to enable more informed communication with their asset managers, try out new strategies, simulations and so on. One of the things that we’ve also seen is the designation of asset classes on a risk basis. Corfe: Do you think all these risk budgeting tools are actually helping? Gayer: To be fair, it doesn’t help to bury yourself in a million lines of code for the next six months. If you use these tools for the wrong purpose, yes, you’re going to get the wrong result. Look at the criticisms value-at-risk received in the global financial crisis. To me, it was a good tool being used in the wrong way, to answer the wrong questions. However, one of the nice things that’s changed in the last couple of years is a focus on long-term industry horizons and a move away from short-termism. This aligns with institutions allocating more to asset classes such as private equity, real estate and infrastructure. In private equity they’re not looking at risk for the next one to three months but for the next five to ten years. What sort of cash flows do we look at? Do I need to think about asset liability, for example? Another thing we saw recently was green bonds. China is one of the biggest markets for green bonds now and we had a Swedish pension fund that designated green bonds as an asset class separate to anything else. These kinds of developments mean a new way of assessing risk, budgeting and allocation, which drives the need for more data, information and transparency. Funds Global: What effect do you think Brexit will have on Asian assets? Murali: We were surprised that the market bounced back so quickly. There was one day of blood and in the next two days it bounced back. In terms of impact, it might be limited in Asia. If you look at places like India and China, their exports to the UK are less than 1% of GDP. The impact will be felt more among European countries rather than outside. Corfe: There’s been an immediate effect of Brexit which was that the Fed appears to have deferred a prospective rate price yet again. That’s been good for Asia because it takes pressure off a dollar rise. There was an effect straight away in the movement of Asian and emerging market high yield debt. A bigger effect could be weaker confidence around European and global trade and that ultimately will impact Asia insofar as it’s still trade-dependent. Zeeh: You saw from the negative pound reaction that a lot of people did not believe this could happen. Going forward, a lot of investment decisions will be delayed because people don’t know what’s going to change and that chips away at economic growth and on investments in the UK and in Europe. So the ECB [European Central Bank] is going to have to continue printing. The low-yield environment will persist. The purchasing power of the UK end of the Eurozone is lower and that is an export market for Asia. So Asia is not insulated from that. But on a relative basis, maybe the exports will just shift somewhere else. Asia will continue to show higher economic growth and continue to advance. Ong: I’m optimistic about Asia. Purchasing power in Asia is now much better than in Europe or the UK, for example. The rising consumer base in Asia means it has more power to do a lot of things, such as buy property in Europe. You’ll see this trade shift continue and that is a chance for Asia to rise up and take a different position. Funds Global: What is your outlook for the equity market in Singapore and the wider Asian region? Murali: Despite the slowdown of growth in Singapore, there are still certain opportunities to tap into. Banks that have lower NPLs [non-performing loans] and are exposed to the regional growth story are a good play on any upturn in the business cycle. In the industrial sector, real estate investment trusts (REITs) are a good source of yield. China still remains cheap. India is a good growth story. In Indonesia, quasi-sovereign bonds in the infrastructure space can be a thematic play on reforms. Gayer: When you talk about account opening, yes, India’s part of the story, yes, China’s part of the story. Even though there are operational and structural difficulties, it is part of the investment philosophy to be in those markets. That’s not going away. Corfe: You’re right but it always bemuses me that China is mentioned because if there’s any market in the region where quality is missing, it’s China. There’s a place for momentum traders always, but from a fundamental perspective, it’s a shocker as a market. Balance sheets are completely politicised, the markets are in the hands of government, it’s a closed market. Why did MSCI reject China this time around? Because of the government’s arbitrary intervention in the market. Ong: But for the Chinese, it’s an experiment. They’re reactive but they learn as they go and it’s a matter of time before the MSCI upgrade happens. Given the population, you can’t ignore this kind of wealth. China is contributing 30% of world GDP. Funds Global: What are the main regulatory challenges facing Singapore-based fund managers at the moment? Corfe: Things have become more stringent on a number of levels around know-your-client and anti-money laundering rules, as well as Fatca [the Foreign Account Tax Compliance Act]. There’s more to be done, compliance departments have got bigger. Recently we’ve seen more focus on operational risks as well, specifically on things like outsourcing. These things are very onerous, very restrictive. So altogether the climate has become more difficult. Zeeh: As the designated compliance officer of my company I see all sorts of things which make me wonder. The government wants to protect the reputation of the financial centre, so it has put a regulator in charge to make sure fund managers are responsible. In turn, compliance officers have come up with all sorts of rules that cover them to the maximum extent. That makes the work of the front office very difficult, but the compliance officer doesn’t have to care. They are there to protect the company and are not compensated to facilitate business if that means taking more risk. That is counterproductive for business. In all kinds of firms, you see different scales of bureaucracy. JP Morgan hired 3,000 legal and compliance staff three years ago. People who work in the compliance industry who just joined companies and who have zero prior experience are making extraordinary amounts of money right now doing not much, or justifying their existence by cranking out policies by the kilo that are being disseminated to different departments. It is a bottleneck to business development. If I’m a compliance officer of a big fund management company, I would go to my CEO and ask for 10% more budget and resources. The CEO is not going to say no, because if something goes wrong as a compliance officer I’d say I asked for resources and this guy over there didn’t give them to me, and they will shoot the guy. Either the small companies have an edge here or the large companies have to become really smart about it. The only solution is to decentralise compliance and put compliance officers in different teams in the front office to help them interpret what’s coming from headquarters and negotiate better implementation. Ong: Although more regulation is more business for me, as a consultant, I actually don’t like it because regulation should help to grow businesses and not be a stranglehold.  In my experience we’ve come to an unhealthy point where compliance now runs the business, which doesn’t make any sense, and I think if that doesn’t change then the industry will die out. Murali: The cost of compliance has obviously gone up, but I don’t think anything’s going to change. No one wants to go out there and say this should be done less, because then if things go wrong it’s your job on the line. We’re caught in the cycle and you’ve just got to get on with it. Ong: I’d like to see regulators in the region create more consistency in terms of rules, even for something as simple as having a standardised format for fund factsheets. Funds Global: How do you see Singapore’s role as an offshore renminbi centre evolving? Do you anticipate a closer relationship between Singapore and Beijing in future? Murali: Given the strong bilateral relationship with China, Singapore is set to emerge as an important platform for financing China’s ‘going global’ strategy, especially within the ‘one belt, one road’ region. We are definitely well placed. Ong: Singapore is a potential hedge against Hong Kong. A lot of Chinese managers that we see are bypassing Hong Kong and coming to Singapore as an option. That could be a good change. Corfe: In terms of offshore renminbi centres, we’re talking about the larger issue of how China progresses its market opening. Thus far it has allowed certain centres such as Singapore and London to trade renminbi, but ultimately the goal is for the renminbi to be freely tradable. In that case, is Singapore so important? I think it is, because it will remain a centre for wealth management and trade. Gayer: We see this as part of a proliferation of passporting schemes and access points.  The trend can wax and wane, but the issue for fund managers is, if you don’t launch a product, if you don’t have a foothold now, you might have missed a potential trend. Funds Global: When you look ahead to the next 12 months, how optimistic or pessimistic are you about the funds industry in Singapore? Zeeh: One development is that the European funds market has become more open to alternative funds from Asia now that the AIFMD [Alternative Investment Fund Managers Directive] has been extended. That could potentially be a game-changer. If so, I see very dark times for the European fund industry, but it’s interesting for Asian fund houses. Corfe: We’re congenitally bound to be optimistic. That disclaimer apart, I would say there are positive dynamics, private bank channels being one. From a larger perspective, there is the potential for increasing allocations across the region.  My caution is in a Singapore context. Not that we don’t welcome competition, but there is a lot more of it now and certainly a lot more fund managers are chasing the aforementioned private banking purse. Murali: Things might taper off a little bit but the past four years have seen very strong growth in Singapore in the industry, for instance capital markets licences growing by 1.7 times during 2013 to 2015.  Singapore’s status as a hub should place us in good stead to move ahead. Ong: From a funds perspective, I am optimistic because we’ve seen growth continue and asset managers are now in a position where they can start to take over the position of the banks. With Singapore, I am hopeful that the investment company structure will attract some assets that might before have been domiciled in Cayman Islands or elsewhere, because people will realise the Singapore regime is transparent, well-regulated and, best of all, it’s got tax benefits. Gayer: We are optimistic about Singapore because we don’t see any shortage of mandates coming to asset managers. Institutional investors are also establishing their own internal asset management capabilities in Singapore, which is a big trend. Singapore is being well established as a central location in Asia to tap into different markets for institutions, and as part of the various passporting schemes there is a lot of drive, for example with the ASEAN scheme and the ARFP. ©2016 funds global asia