December 2010

EXECUTIVE PANEL: world view (extract 2)

RT_Dec10In this second extract from FE's roundtable discussion, our panellists discuss their top new markets with potential and the value of having a local presence. Funds Europe: to what extent do you envisage having a local presence in these new markets and what functions will this presence consist of? And, of the new markets that we are talking about in Asia and elsewhere, which three do you think offer the greatest opportunities for asset managers in the next ten years for institutional and retail wealth? Todd Ruppert: It really comes down to the strategy of each individual company. They have to look at their own culture, brand, products, servicing principles and fee principles, and match all that up with their target markets so that it makes sense. Everyone around this table might pick a different market that is most attractive. Helena Morrissey: The issue of a local presence has to be separated out into the investment aspect and the distribution aspect, and whether that might include on-the-ground client service.

The investment process for us is all about having a single location where the communications between fund managers and analysts are key. Therefore we wouldn’t want to blow that apart by having a local presence in the regions we are talking of.

This means that when it comes to actually meeting fund managers, for us that is quite a challenge. We want to have the fund managers managing money for our existing clients and therefore perhaps in today’s networked world where there is more telepresence, there is more of an opportunity now for us to communicate like that and to limit face-to-face meetings.

But in our case, we can have people on the ground, at least in the major centres, through BNY Mellon Asset Management, which is there to develop relationships with clients and which knows the requirements of local practices in these disparate regions. Funds Europe: Do you mean that, say, if you invest in Asian markets it is best for you to keep fund managers here in Europe? Morrissey: The ideal is to be able to have fund managers managing money without any kind of distraction from marketing exercises, because that is what the client is paying us to do – to look after their money. So for us, local presence is more about business development and client servicing in the local language and so forth, and sometimes local legal help, but also to have fund managers very much back at the ranch and meeting clients and prospects when they come to London. Clive Bellows: There clearly is no solution that works for every organisation, but I think, from where we sit as an investment service provider in the market, we observe and have to react to what our fund manager clients are doing, and we definitely saw a trickle in 2010 of global asset managers putting more manufacturing into Asia. They seemed to be gravitating towards Singapore, rather than Hong Kong. We are seeing more of our fund manager clients having fund managers on the ground and telling us the reason for doing so is they believe having a local manufacturing presence will help them distribute their product. Ruppert: If you look at the pools of money, whether retail or institutional, the vast majority of it is local, so one should consider locally manufactured products. Clearly there is some global diversification taking place, but most of the money is local.

Massimo Tosato: In our case, we have a presence that dates back to the 19th century because of Schroders’ investment banking history. We then started to build the asset management business in Asia and in South America about 40 years ago and have become very much a local company, starting in most of these countries with a local investment capability to be distributed to the local client base.

As a second step, we started to add in those regions a regional investment capability, so pan-Asian equity, pan-Asian fixed income products, pan-Asian multi assets, and the same in South America, to be offered locally and exported globally.

Eventually we started to offer scalable, global products for local distribution, leveraging the inroad that had been built year after year with a local-to-local capability.

Now, for the regulatory and taxation environment which we are in, we are even considering putting some of our global capabilities in those financial centres like Hong Kong and Singapore because there are competitive advantages in positioning more fund management capabilities there.

In terms of distribution, all of our business development, our sales, product management and marketing support are already there. This has been a step-by-step strategy developed over the years. Probably India is the only significant market, or potentially significant market, where we are not present. Gary Withers: You only want to invest in alternative areas if you expect similarly high returns. There is some cross investment between Asia and Latin America, but for many emerging markets it’s all about domestic investment. Morrissey: Although there is not one size that fits all, we find that the flow of information is greater with our managers in one location, with distribution being the more ‘local’ element. It does intrigue me that one of our first mandates out of Asia has been a large European equity mandate for a Chinese institution. Tosato: It’s interesting that you mention China, because as the main developing economy, that will have a major role in the future of our industry. In considering the implications of this, we have to consider the huge cultural difference that exists between the US and China.

America is an inclusive society and culture, so it takes everything in and accepts and digests it into its own culture.  China has a culture which tends to differentiate more between insiders and outsiders.

So, if you want to operate in China in addition to working with sovereign wealth funds and some large institutions through the QDII mechanism, it is mandatory to take a minority position in a joint venture with a local partner. We have one ourselves with which we are very satisfied in every aspect. That is the only way to access the domestic retail market. And you may be sure that the regulations will not be changed until the Chinese government feels comfortable that the transfer of knowledge and the capability to compete has been built. Ruppert: I think there is a big desire and push by many of the asset managers in China to be global players. Virtually all of the asset manager QDII funds today – for which there was a regulatory requirement for the local Chinese asset manager to have a relationship with a foreign organisation – have been disassembled because the Chinese want to do things themselves. Tosato: Mirae is one of the few North Asian ex-China companies that is currently starting a global expansion. Bellows: Without a doubt the Chinese want to be global. Just take ICBC taking a 20% stake in Standard Bank in South Africa as a good example; they clearly see their horizon as far broader than just Asia. Funds Europe: And so which are the three markets that you see the most potential in? Morrissey: It goes back to this issue of where the stock of wealth is. I think at the moment, obviously Japan is a very big part of the actual pool of assets that is available right now, so it has to feature on the list, and then for us certainly Korea is a big area. The focus then is probably more on emerging markets. Australia is also very important. Tosato: Australia is important. It has among the most long-term and consistent retirement capital flows in the world today. Ruppert: It also provides stability to the fund industry as well, like in the United States with so much retirement money. Tosato: In terms of individual savers’ markets we think that, if you take a ten-year view and beyond, probably Brazil and China are the two biggest opportunities that we can see. If we go within ten years we are talking about Korea, Taiwan and Chile.

With regards to institutional money, we see more channels than countries, so in these terms sovereign wealth funds have been by far our highest growth segment in the last three years, and insurance companies, because insurance companies are capturing all the long-term savings plans.  For this reason we have also built a joint venture in two asset categories with Nippon Life. Ruppert: Australia is a very important marketplace, and I would agree with Massimo that there is a wonderful opportunity long term in China, not only in sovereign wealth funds, but also with group finance companies that are going to start putting money offshore, like insurance companies. And I think there will be, over time, for those that don’t have a local joint venture, some sub-advisory opportunities as the market opens up.

In Japan, the institutional and retail markets are quite different; there are many headwinds in the institutional business, but there continues to be good growth on the retail side. The country we have not mentioned yet is India, where the rise of the middle class and the huge savings rates there, along with the continuous development of the country, is going to offer great opportunities for asset management. Tosato: I agree with you on India as a long-term opportunity, but I am not sure how easy it is going to be in the next five to ten years – that’s why I did not mention it in my time horizon.

First of all it’s still a small market that is now beginning to move from being a money market to holding some more in equities. But Sebi [the Securities and Exchange Board of India] stalled the market last year by suddenly stopping front-end loads, and changing other aspects of regulation. They have basically broken down the distribution business model and now all the companies that want to continue to do business there have to finance at least some part of their distribution out of their P&L. As a result, many asset managers are losing money. Ruppert: I don’t think that is completely true, but your point is a valid one. I think that Sebi  directionally wanted to try and protect investors, but the unintended negative consequence of Sebi’s action is that these investors are now sold Ulips [unit-linked insurance plans], which contain high commissions and may not be in the investor’s best interest. But I can’t believe that the regulator is going to allow the mutual fund industry to die on the vine. It’s critical to the development of the local marketplace to have that flow, so at some point this has got to change. Tosato: The principle per se is right in the sense that you could say India wants to limit or manage the costs to the retail investors. But the way in which they implemented this is a bit brutal. Do you think it is still possible to make money in today’s environment in India then? Ruppert: Yes. We entered India by acquiring a large stake in one of the largest asset management companies. What I believe will transpire is that the smaller players will be squeezed out due to being unprofitable. But the larger organisations are still profitable. Distribution patterns have changed a little bit but if you have got wide distribution across the banks, the distribution companies, IFAs, there is a lot of staying power there. But certainly there has been a squeeze, that’s for sure. Funds Europe: From an asset servicing perspective, which three markets would you elect? Bellows: The three markets where clients are looking for help with investing or distribution are India, China and Brazil. ©2010 funds europe

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