May 2008

ASIA: As long as you're shore ...

An onshore presence in Asia’s growing fund management market is increasingly vital in order to cope with regulatory changes and local competition, says Nick Fitzpatrick, at Fund Forum Asia ...
European-based fund managers who feel that their optimum strategy for Asia is to sell funds from remote locations such as Luxembourg or Hong Kong may have to think again.

Offshore funds did well in South Korea until the authorities changed tax rules in favour of onshore funds. Almost overnight any manager without an onshore business would have been caught short. South Korean onshore business has doubled while offshore business has halved, according to Lester Gray, Schroders Investment Management’s CEO for Asia Pacific.

There are now fears that Taiwan may follow suit after strong growth in its offshore funds sector. 
In 2002, assets under management in Taiwanese offshore funds stood at 543bn TWD (£9.027bn). In 2007 that figure is 2.102 trillion and according to Stephen Billiet, CEO, ING Funds, in Taiwan, this year is the first year that offshore fund assets equal onshore funds.

“That worries the regulators a bit,” he said. “They look at what happened in Korea. If this trend continues I wouldn’t be surprised if the regulator did something to slowdown offshore funds.”

Regulatory changes in favour of onshore funds are a sign that markets are maturing. These changes foster local asset management talent and prevent jobs and skills gravitating to offshore locations and foreign managers.

Local managers are now on the build. Most of China’s top ten asset managers are domestic rather than foreign joint ventures, for example. They and their governments smell the opportunities presented by Asian asset management as acutely as European and North Americans do.

“In India, you see people going to work at six o’ clock in the evening, because it is in line with the United States,” observes Nimesh Shah, CEO, ICICI Prudential Asset Management, a joint venture between Prudential, the UK insurer, and India’s ICICI Bank. The company has 380bn rupees (£4.73bn) of mutual fund assets.

Regulatory changes
Anecdotal signs like this of Asia’s economic rise, together with heaps of hard data, mean any European fund manager who doesn’t yet see sense in having an Asia strategy may as well go back to bed. But those with a one-sided, offshore business model are also less likely to do well as markets mature.

Fund managers require a business model that can capture both sides of regulatory changes like that of Korea’s. Regulatory changes can cause seismic shifts in asset bases.

ING, for example, is positioned for the anticipated change to Taiwanese tax laws because in 2006 it bought ABN Amro Asset Management’s domestic business in the country. The cost of entry was around e68 million but ABN Amro at the time was the fifth largest local mutual fund manager in Taiwan with assets under management of e2.9bn. However, not everyone saw sense in the move.

“We bought ABN Amro Asset Management’s business one and a half years ago. It was an onshore asset manager and people asked us why we were buying it because the [onshore] market had no growth,” says ING’s Billiet.

It now stands to gain from the expected tax change that will boost onshore business. But even if this tax change does not materialise, the firm still stands to benefit from another regulatory change affecting onshore and offshore funds.

In Taiwan, insurance houses were last year given permission to sell onshore products – a move that will surely further promote the business. Billiet says this amounts to around 50,000 sales agents now authorised to sell onshore funds.

He notes that the asset mix in the country has been significantly stirred up in recent years to include more equities, and that local investors are increasingly looking to access international capital markets through onshore vehicles. Whoever scoffed at ING’s decision to buy ABN’s business must be smarting now.

Mark Browning, managing director at Franklin Templeton Investments in Asia, says offering just Ucits funds, which are widely recognised by regulators in Asia, is fine if the target market is Hong Kong – or even, for the time being, Taiwan. But further afield this limited offering is not sufficient and a more robust business model is needed.

Franklin Templeton’s business model reflects its belief that every country in Asia is unique, Browning says. In Hong Kong the firm offers a Sicav in the retail space. The same applies to Singapore where there has been a trend to close feeder funds. In India and Japan the firm has a domestic business. In Vietnam it offers private equity through a joint venture. Its business in Malaysia is mainly institutional, while in China, Franklin Templeton is in two joint ventures.

“For each country we have a very bottom-up strategy,” says Browning.

It is not just regulatory changes that make a ‘remote access’ strategy difficult. Fund managers looking for distant access to Asia through the intermediaries of large distributors like Citibank had also better think again. The idea that distributors will gladly offer foreign funds managed offshore just because they are internationally recognised Ucits funds, may be flawed. 

Feet on the ground
Stella Chua, regional head for investment products, Citibank, says: “Generally we expect a reasonably good team on the ground where you want us to sell your product.”

The case is even more pressing in India where Shah, at ICICI Prudential Asset Management, pays for a sales force to sell his products in the foyers of the country’s state-owned banks. 

“The real challenge for [fund managers in India] will be to work with the nationalised banks,” says Shah. “The man behind the counter there has never sold anything.”

And with 33% of the country’s distribution being through independent financial advisers, fund managers need “a lot of offices” to be close to clients, he says.

Asia is coming of age. Regulations are in a state of flux as the business matures, while distributors are realising their power. 

Regulators and distributors in the region may well admire Europe’s cross-border products, but without feet on the ground, funds imported to Asia will be perpetually harboured.
© 2008 funds europe 

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