Summer 2010

INDUSTRY GROWTH: A force to be reckoned with

BoatsHow long will it take for Asian fund management companies to become a global competitive force, asks Martyn Cuff, managing director of Allianz Global Investors Europe. Looking at the chronology of the global fund industry, and if you assume it started at the same time as stock exchanges were formed, then the European fund management industry has the longest history (around 400 years ago), followed by the US (started around the end of the 18th century) with Asia being the most recent entrant into the business. Mind you, Bombay claims to have had a stock exchange since 1875, so ‘recent entrant’ is a subjective term. However, the past 400 years of history should not necessarily be seen as an indicator for the next 400 years or even the next 40. Between 2010 and 2050, there will be many economic and demographic changes, estimates of which are highlighted in the table overleaf.
What is clear from these statistics is that influence is shifting from Europe and the US to other parts of the world, namely Asia, Latin America and the Middle East. This has been underway for some time and is not a surprise to anyone. The question is how this affects the emergence of future fund management businesses, particularly in Asia.
There are plenty of examples of Asian companies that have become global brands. These include industries such as motor vehicles, electronics and heavy plant machinery. In addition, we have seen Asian banks venturing beyond their national borders for a numbers of years. However, why have we not already seen Asian fund management companies playing on the global stage especially since the barriers to entry into money management are very low and there is always scope in our industry for new creativity? The early stages
Before the internet era, companies in most industries would typically start to build their business in their own country. They would establish a strong presence and use profits from their domestic business to expand abroad. While the internet potentially allows companies to go global much more quickly, it is still mostly a case of going local first, then global. With this in mind, there is clear evidence that we have seen the first stage of the Asian fund management industry. This is being accompanied by:
• Economic growth
• Increased cross-border trade
• A growing savings pool (be that individuals, sovereign wealth funds, pension funds)
• The greater embracing of capitalism
• The development of capital markets
All of this activity, in turn, breeds a growing population of investors, both institutional and retail. Examples are:
South Korea: There are 10,000 mutual funds domiciled in Korea, almost twice as many as in the US, whereas the population is one fifth the size. Most of the funds invest domestically and it is mostly Korean fund companies that dominate. The largest player is Mirae Asset, which has a 25% market share.
India: There are around 30 fund management businesses in India. These are joint venture companies such as ICICI and Prudential, BNP Paribas and Sundaram, Sun Life of Canada and Aditya Birla Nuvo, plus fully domestically owned firms such as UTI Asset Management, Reliance Asset Management and SBI Fund Management.
China: Like India, the local authorities have encouraged established non-Asian companies to enter the Chinese market through joint ventures. This is a calculated way of opening the Chinese capital markets in a controlled fashion while allowing the importation of skills and knowledge from developed nations so help the establishment of the Chinese fund management industry. In addition, some domestic fund companies have been established, such as China
Asset Management and China Southern Fund Management.
However, we should not get ahead of ourselves. There is still a long way to go before the Asian domestic fund management industry is at a fully mature stage. Even so, there are a few early signs that sights are being raised beyond domestic boundaries. The next phase of development
This natural next phase of the industry’s development is strategically significant, certainly up there with the expansion of US money managers outside of the US in the 1970s and ‘80s and the introduction of ETFs around the turn of the century.
There are several drivers that will push this next phase forward and these are:
• Desire to see national champions: Certain countries are not hiding their ambition to create national champions in a wide range of industries and the fund management business is no different. This is both as a defensive measure, given the strength of established non-Asian firms, and as an offensive measure to establish a share of the growing global marketplace.
• Desire for growth and scale: While Asia has the majority of the world’s population, today they do not dominate the store of wealth. In addition, the capital markets are not mature in the various countries, plus the culture of investing is not fully embedded. As such, the actual size of the fund industry is relatively small, albeit growing rapidly. Accordingly, a successful fund business can find natural domestic growth limitations relatively quickly and will be forced to look beyond domestic boundaries. In China, for example, they are doing this by establishing funds in Hong Kong for QDII purposes so that the domestic savings pool of China can be channelled into global markets. It will be no surprise for a Chinese investor, who is considering investing outside of China, to go through a company that is well known to them or at least has a strong existing brand. Another example is the Indian company Birla Sun Life Asset Management, which has very recently announced its plans to expand into Singapore as a first step to developing a global fund management business. In South Korea, with Mirae’s 25% domestic market share, it has already expanded abroad to locations such as Brazil, India and the UK as well as in Luxembourg where it operates a Sicav. This is impressive for a company that did not exist 15 years ago. 
• Recognition of competitive advantage in managing money: There is a major trend at the moment that sees many investors moving away from their ‘home bias’ and allocating assets to emerging markets. Given the future economic and demographic situation, this is set to continue. It is quite feasible that Asia-based fund management companies will claim that they are better placed than anyone else to handle this money, given their potential competitive advantage of being from the very emerging markets in question. Is it so difficult to imagine a fund buyer in the US or Europe adding a South Korean or Chinese fund management company to their buy list for exposure to these respective equity markets?
• Demand for Asian money management: Building upon the above point, it can be argued that even if there is no local competitive advantage, there will be increased demand for Asian investment skill. Supporting this is the fact that Asian GDP and market capitalisation will become larger, both absolute and relative. Hence, global benchmarks will see an increasing Asian component, which in turn requires money allocated to this region, to be managed. Statistics from Cerulli also show that Asia ex-Japan has the highest growth of assets under management by region which further supports the notion that the importance of Asian money management will increase. In an interesting twist to this point, in 2009 Deutsche Asset Management transferred its Hong Kong equities and Greater China teams to its JV partner, Harvest Fund Management.
• Distribution power: Domestic financial services companies in Asia have potential distribution power, whether these are insurance companies, banks or agent networks. Without access to such networks, non-Asia fund management businesses struggle to gain traction, whereas for the local Asian businesses, such distribution is a powerful weapon. To date, Japan is a good example of this, though this experience is also being played out in other Asian markets. Interestingly, looking the other way, it is not yet that easy for Asian fund managers to establish distribution outside of their domestic markets. As ever, distribution remains critical to the dynamics of a fund management business.
• Insurance asset investing: With the insurance industry set to grow in Asia, this will result in the need to invest the insurance assets, eg premiums and contributions, just like in any other region. Given that 59% of the world population is based in Asia and there is a growing middle class, then this has the potential to be a significant source of money to be managed. It is understood that Franklin Templeton has a relationship established with China Life for the sole purpose of managing their insurance pool
of assets. Timescale
So how long will this next phase take to play out? It took Honda Motorcycles 20 years to break out of its domestic market and become a real player in the European/US markets. Given that today the world is more global and interconnected and given that the process of Asian companies venturing beyond their domestic markets is already underway, it is hard to see why fund management firms from China, South Korea or India will not be recognised brand names in the global marketplace within the next
ten years.
This means that the existing fund management companies from Europe and North America will see increased competition and this should ultimately feed through to benefits to the end consumer of investment products.
As for the established global fund management companies, they have a head start over domestic-only Asian firms since they already have global experience plus will claim a certain degree of local expertise in a variety of world markets. Accompanying this, the best talent in Asia may be drawn to already well-known and established worldwide firms. It will be fascinating to see how these two forces play out over the years ahead. ©2010 funds global

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