Armin Choksey and Conal McMahon of PwC says there is a large-scale and diverse demand for products in Asia-Pacific.
Developments in Asia-Pacific (Apac) during 2019 within the asset and wealth management space continue apace against a backdrop of increased global uncertainty and volatility.
PwC’s Apac Asset and Wealth management market research centre in Singapore has classified Apac developments into four broad trends. These are: shifting investor preferences; digital; fee pressure; and market entry. In this article we look at shifting investor preferences.
Apac individual investors across all segments, spurred by rising incomes, the disintermediation of investment products via the spread of digital platforms, and lifestyle changes, sought to leverage their investible assets and the ease of purchasing funds across a range of products.
Passive investments surged, with Australia, Japan, South Korea, and Taipei leading markets in the region. The success of ETFs was not limited to vanilla products, with asset managers successfully launching inverse, leveraged, thematic, and strategic beta/smart beta ETF products. Smart beta and factor investing in particular showed great progress, with smart beta ETF assets tripling since 2013, likely due to lower management costs, greater transparency and superior performance.
Evolution in the cross-border ETF space continued, with the launch of the Japan-China ETF Connectivity scheme, an Indian ETF launched in Australia, and the Korea Exchange planning to allow domestic retail investors to trade foreign ETFs via an ‘ETFs of ETFs’ mechanism.
Solutions-focused and multi-asset approaches continue to be strong, with asset managers responding to investors’ increased need for diversification and customisation by establishing and expanding their multi-asset solutions businesses. These products are geared towards investor goals, such as retirement and education, whilst others are focused towards better aligning investor interests with investment goals.
Singapore and Hong Kong appear to be where teams managing these products are mainly located, despite potential challenges in penetrating the Hong Kong market due to limitations on the use of derivatives. Regulators throughout the region are taking steps to increase the availability of these products to investors, particularly in the target-date pension fund space where Singapore, South Korea, China, and Taipei promote them to alleviate the retirement savings gap. With the ageing population of Apac continues, such products are likely to become increasingly mainstream.
Faced with a low-interest rate, high-volatility environment, many investors are seeking income-focused products. In response to this demand, asset managers across the region have launched a plethora of income-themed multi-asset funds and retirement income funds in recent years. Hong Kong and Singapore witnessed healthy net flows into said products during the first half of 2019, and distributors, including robo-advisory platforms, are increasingly allocating shelf space to accommodate these products.
At the institutional end of the investor scale, the focus has increasingly turned towards alternative products and sustainable and green financing. Greater awareness of the comparatively lacklustre performance of many active products against index funds, coupled with the need for sustainable, long-term returns in a low-interest rate environment, drove institutional investors into the arms of alternative asset managers.
Australia and Japan have proven to be front-runners in terms of the number and scale of environmental, social and governance (ESG) funds, with Japan’s Government Pension Investment Fund setting regional standards across fees and allocations towards alternatives and sustainable products, announcing its intent to invest in ESG-focused green bonds from 2020. Other government-backed institutional investors are expected to adopt its standards or base their own off them. In other markets, Korea’s National Pension Scheme recently adopted a code designed to encourage institutional investors to actively participate in corporate governance, India launched it’s first “ESG-labelled” fund in 2019, and Indonesia became the first country in the world to sell a sovereign green sukuk bond.
On the regulatory front, Hong Kong’s Securities and Futures Commission (SFC) provided guidance on enhanced disclosures for SFC-authorised green or ESG funds for SFC-authorised unit trusts and mutual funds.
China too has sought to put green and sustainable finance into a more prominent position, with the 13th five-year plan making numerous references to green and sustainable developments in the economy and wider society. This is filtering through to the financial sector and China is an increasingly dominant player in the issuance of green bonds.
Of the Apac economies, China and India are at the forefront of riding the digital wave of fund distribution, with online fund distribution dominating fund sales in China, whilst retail payments is the operational theme for the first round of experiments under the Reserve Bank of India’s regulatory sandbox 2019. ASEAN economies, particularly the emerging ones with their young, digitally savvy populations, are also poised to leapfrog traditional distribution channels and emerge as strong digital distribution markets. Japan and South Korea are also making inroads in this space.
Outside of distribution, markets are adopting other aspects of digitalisation, with Singapore and India reintroducing e-KYC [know your client], Australia integrating distributed ledger technology to aid in investment into digital assets, and a plethora of virtual banking licenses being issued.
Partly as a result of digitalisation, changing investor preferences and increasing compliance costs, Apac’s asset managers are facing pressure on margins across multiple fronts, though they are not sitting idle as digital platforms, passive funds and virtual banks threaten to take market share. Numerous zero-fee and low TER [total expense ratio] funds have been launched in a bid to defend and regain market position.
Regulators across Apac are increasingly active in shielding investors from high fees. Indian regulators have implemented a ban on upfront commissions, Taipei’s regulator has banned marketing commissions, Singapore is expected to remove sales charges on its Central Provident Fund products by October 2020, and China’s quasi-regulator-cum-asset-management-industry-association is pushing for industry-wide reform, targeting front-end fees and trailer commissions.
In response to this pressure on their bottom lines, asset managers can rationalise fund offerings to optimise cost structures and distribution and increase revenue by introducing specialised funds, which investors increasingly demand and are comfortable paying higher fees for.
Along with the product and distributive changes mentioned, asset and wealth management markets across Apac are opening up to foreign asset managers via the loosening of local regulations or cooperation with regional bodies to ease market entry processes. Such developments increase the opportunities for local, regional and global managers, along with investors.
Arguably, the biggest event of the year in terms of market access was the launch of the Asia Region Funds Passport programme. This seeks to replicate the success of the Ucits funds-passporting regime in Europe across Apac, which would provide enormous opportunities to asset managers and investors alike. Various regional cross-border initiatives were also launched, including the aforementioned Japan-China ETF Connect, and Hong Kong entered into two additional Mutual Recognition of Funds (MRF) agreements, with Luxembourg and the Netherlands, bringing the total number of Hong Kong MRFs to six.
Locally, regulators in Taipei agreed to allow licensed banks and brokers to bypass the need for a master agent and raise funds for offshore private placement funds, Thailand introduced a new category of qualified investor that can invest up to $1 million per year in offshore products, China announced a raft of programmes to encourage foreign asset managers to enter its market, including bringing forward 100% ownership of public fund companies to 2020 from its initial target of 2021, and Vietnam removed foreign ownership restrictions in publicly-listed companies.
A hotbed of opportunities
Opportunities across Apac are varied and diverse, leading to a hotbed of opportunities where there is something for everyone on offer: from mature fund centres to emerging economies, large institutional investors to retail investors numbering in the hundreds of millions, active-centric investors to those wanting passive products.
The opportunities are reflected in the investment pools being deployed across a range of products, whether in ETFs for lower fees and index-tracking, income-themed to beat the low-yield environment, multi-asset solutions to mitigate against volatility, target-date pension funds to ensure adequate savings for a comfortable retirement, alternatives to chase higher returns, or environmentally focused products to spur sustainable and green projects.
Asset managers must balance these opportunities against changes sweeping the industry. For whilst they may find their products increasingly in demand, they are also finding investors increasingly unwilling to pay active fees for passive returns – or any returns lacking sufficient alpha. How their products are distributed is also in flux, with digital distribution emerging as a potentially dominant channel in mature and emerging economies alike and enabling greater disintermediation of investing across the region.
Numerous regulators across the region have taken steps to increase market access to foreign firms, broaden the pool of investors, ease investor restrictions on investing in offshore products and remove ownership limits.
Thus, whilst there is still ample volatility and uncertainty in markets, the trends in Apac across 2019 should see asset and wealth managers in good cheer as they ring in the new year.
Armin Choksey is leader and Conal McMahon is senior manager at PwC’s Apac Asset and Wealth management market research centre
©2019 funds global asia