Indonesia, Malaysia and Thailand have seen double-digit annualised growth rates in assets under management over the past five years, but the potential Chinese megamarket has seen only limited growth. Aymeric Poizot of Fitch Ratings analyses the developments.
Emerging Asia – China, Indonesia, Malaysia and Thailand – is likely to see the continent’s highest growth in assets under management in the coming years.
A large and growing middle class population, coupled with much lower levels of fund investment than in Western countries means the area has significant potential.
Investments in funds make up 5% of total financial assets, compared with 15% in the West, according to the Economist Intelligence Unit and the Boston Consulting Group.
East Asia consists of $2 trillion of offshore assets under management, mainly distributed in Hong Kong and Singapore, $1 trillion of domestic funds’ assets and $2.5 trillion of institutional assets concentrated with few pension and sovereign wealth funds. The latter excludes third-party managed assets.
The area can broadly be divided into two groups of countries, based on the development of the asset management industry and the size of their middle class: developed Asia with Hong Kong, Singapore, Taiwan and Korea; and emerging Asia with China, Indonesia, Malaysia and Thailand.
While Indonesia, Malaysia and Thailand have seen double-digit annualised growth rates in assets under management over the past five years, the potential Chinese megamarket has seen only limited growth. There are several reasons for this: there has been a focus on equities in the country during a five-year bear market, with China’s fixed income market remaining under-developed until recently.
The launch of wealth management products within banks and fierce competition among different players, such as asset management companies, trust companies and securities companies, have also contributed to a lower growth profile for China’s asset management industry.
Stabilising equity markets and recent regulatory initiatives may allow the gap between China and other markets to be closed in the next few years. We already observe the rapid development of fixed income funds in China, which now account for 40% of total fund assets under management.
However, distribution in East Asia can be challenging. The cross-border market is concentrated in the Hong Kong and Singapore wealth management segments and with a small number of sophisticated institutional investors.
As a result, competition between international managers is intense. In the retail market, the region is geographically fragmented and large consumer banks dominate distribution in most countries, making distribution agreements key to success.
In a number of countries, including China, Thailand and Malaysia, the authorities require asset managers to have local fund management operations.
This can represent a challenge for international managers. The majority of the top 15 domestic managers in East Asia by onshore mutual fund assets under management, are local companies linked to domestic financial institutions. There are also a few joint ventures with foreign organisations.
As fund investments are growing in East Asia, investors are increasingly confronted with the limited diversification available in their respective markets both in fixed income and equities.
While investing overseas is a desirable option, it is not always possible given onshore funds are biased toward domestic assets and foreign funds are not always accessible.
Funds from international providers can be sold directly in Singapore, Hong Kong, Korea and Taiwan, notably through bank branches, private banks, wealth managers or financial advisors.
In Malaysia and Thailand, offshore funds can only be sold through wrapping structures, while in China and Indonesia, the distribution of offshore funds is not yet permissible.
As regional hubs, Hong Kong and Singapore account for $2 trillion of offshore funds’ assets under management, largely consisting of European Ucits funds whose number has grown to reach around 6,000 funds registered for sale in the region in 2012.
Large foreign managers offer broad cross-border fund ranges in Asia to address investors’ needs in search of geographical and asset class diversification. The focus is largely on equity and bond funds, which can serve as bricks in a diversified portfolio allocation decided by a local advisor.
While Asian authorities have started to discuss a regional passport for funds, similar to Ucits in Europe, the most promising development resides in renminbi-denominated funds, managed out of Taiwan, Singapore or Hong Kong.
Domestic funds in East Asia exhibit a bias towards core fixed income products and 2012 flows favour bond and money market funds across the region.
These funds have perceived similarities with deposits that still represent an important proportion of households’ financial portfolios. However, like in other regions, multi-asset and internationally exposed funds are likely to attract growing flows in the coming years as they offer more diversification.
The move toward internationally-exposed funds may be less prevalent in China as the future size of its capital market, including fixed income, could offer enough diversification.
Aymeric Poizot is a managing director, Middle East and Africa fund and asset management ratings, at Fitch Ratings. He is co-author of Asset Management in East Asia: Growth Shifting to Onshore Markets
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