HONG KONG ROUNDTABLE: The technology of marketing funds

Our Hong Kong panel discussed consolidation in the industry, social media marketing and whether it is better to partner with private banks or with Alibaba. Chaired by George Mitton in Hong Kong. Hong Kong roundtable 2015 Alex Boggis (managing director, Aberdeen Asset Management)
Rajeev Mittal (chief executive, Asia Pacific, PineBridge Investments)
Richard Tang (chief executive, ICBC Credit Suisse Asset Management)
Jelle Vervoorn (chief executive, HFT Investment Management)
Beonca Yip (regional head of adviser distribution, Asia ex Japan, Investec) Funds Europe: To what extent is the fund management industry polarised between large players with broad offerings and niche or specialist players with a focused range? Is it necessary to be either of these two types of industry actors? Richard Tang, ICBC Credit Suisse: Every company has to ask, what’s the competitive advantage we have? In our case, it’s Chinese currency-related products. Based on that concept, we try to offer a broad range of products. At this stage, we are more focused on institutional clients. You cannot be everything to everyone. Rajeev Mittal, PineBridge: It’s a dilemma we’re all facing in this industry. To some degree, the industry will become more bifurcated. There’s going to be a marketplace for the very large players – that’s where investors will get their beta – but what we’ve learned from the global financial crisis is big does not necessarily mean better. People are going to ask, “Why am I paying so much for this?” So that will lead to more pressure on fees. Investors will continue to get their alpha from small players, specialists either in alternatives or in equity strategies such as deep value. The challenge is going to be for those in the middle. There is a lot of “me too” in this marketplace. How do you differentiate? We’ll see consolidation. Alex Boggis, Aberdeen: It will be hard for medium-sized firms to operate with the fee pressure. At this stage of the industry cycle, where we’ve all enjoyed a strong financial cycle because of quantitative easing, a number of businesses will struggle if things get harder – that’s the cycle of life and it keeps everyone healthy. Is the industry becoming polarised? I think so. In Asia, a number of big names dominate the markets. Brand is important in Asia. It will be especially so in China. There are also a lot of small players who do very well and are niche. Is it necessary to be either of these? I suppose the utopia is where you are a strong, qualitative active manager but also large. It’s not easy, and we have challenges like everybody else, but we at Aberdeen are trying to be the best of both worlds. Jelle Vervoorn, HFT: Distribution practices, especially on the retail side, play a big role in this polarisation. It ties into fund passporting. Schemes such as Ucits and, going forward, mutual fund recognition, will mostly help the large players in establishing bigger platforms. Why? Because distributors don’t want to have a hundred fund houses on their platform, so they tend to form links with the bigger companies with a broad offering of funds. One thing that could change this is technology. For instance on Facebook or YouTube, you get specific advertisements, maybe of brands you haven’t heard of before, based on your online behaviour. You get more tailored solutions. This may offer a way for niche players to reach customers that’s not available in mainstream fund distribution today. Beonca Yip, Investec: It is true to some extent. Investec Asset Management believes in the importance of offering total solutions to investors. Asset managers which offer an integrated range of products can provide different investment solutions in changing market conditions and cater to investors’ different investment objectives. It would be helpful to diversify portfolios. Especially in Asia, investors prefer tailored solutions and they switch between products. It is certainly a competitive advantage the asset manager has a broad offering.  However, some investors have a preference for specialised products or investing in certain asset classes. If asset managers with a focused range can generate alpha to investors, they will be in favour among investors by fulfilling their needs in the market. Funds Europe: How important is the corporate brand for an asset manager? Is the brand of funds, in general, sufficiently developed as it competes for attention within financial services? Tang: According to our limited experience, when you have a brand such as ICBC, BlackRock or Fidelity, when you approach a sovereign fund, you find the person you meet is also thinking about potential risk. In general, they’re not going to recommend a small, boutique firm. Their recommendation to their boss or to the owner is a big brand name. It’s human nature. However, small firms can be innovative. If a big firm has great management which can motivate the team and always try to be innovative and try to provide the best service to the potential clients or current clients, this will be a fantastic scenario. But in most cases, I would say it’s pretty hard. Mittal: It depends whether it’s the institutional market or the intermediary retail market. We’re beginning to see, at least on the institutional market, a shift away from just brand. I agree some people feel career risk if it’s the first time making an allocation to a certain strategy – better to go with the safe option. But there is a shift. For instance, I see us at PineBridge as a challenger brand. We’re not a well-established brand like some of the big names in the marketplace, but we’re making traction, and part of this is because of the solution we’re providing. If you have a strong process, a strong solution, you can make headway. On the intermediary side, there are risks with a lot of these partners that have gone with the biggest brands. Some partners which, ten years ago, had an open platform, have now become much more concentrated to certain well-established houses. If everyone’s doing the same with the same people, you get concentration risk. How do we challenge that? It’s about being specific about what we can offer and being clear about that proposition. Boggis: Brand is clearly important, especially if you’re doing retail sales. People want to have trust. Institutionally, of course, brand is also important, but institutions naturally dig deeper into what you’re doing, so it comes down to your product, the quality of your product and history of your product. Some of the bigger houses have done well in recent years because they’ve thrived in a very passive environment where money has been pumped into the system. And in some of these cases, they’ve been able to adapt to that and get good results from it. Looking forward, their brand will become even more important because they’re going to face a lot of struggles. We’re beginning to see a normalisation of markets where the quality of what you do and what you own is very important. Vervoorn: A strong corporate brand is absolutely important, but the question is what does it stand for, and are you as a company in control of that? Is that brand actually what you deliver and what you want to deliver? There can be a discrepancy between the two and that’s where the risk comes up. Obviously, there are selectors who go for the safe brand, and, OK, something goes wrong with Volkswagen – it’s Volkswagen, not me, that selected that car. But there are a lot of professionals in those roles who add value to the search process, they would go outside of the common names and to demonstrate their added value. Yip: Corporate brand is clearly important. Asset managers or other financial institutions have been working hard to rebuild trust and confidence from investors since the financial crisis. A strong brand is effective to build trust and it is important to investors in Asia.  In recent years, many asset managers have put lots of resources and effort in brand-building in hope of building closer relationships with investors. This is especially important when investors choose asset managers based on brand recognition. Funds Europe: Is the industry quick enough to harness technology in order to know its customers and serve them better, taking into account social media, mobile technology and big data? Vervoorn: The funds industry is not at the forefront of technology. The question is, does it enable you to service your customers better? And you have to ask, who is servicing the customers, is it the distribution channel or the fund manager? Social media communication and online sales seems to be more the area of the distributor for now. If you look at YouTube, Facebook, Twitter, you get a lot of targeted advertisements and links. You could apply the same to the investment industry. That could be quite a game-changer in the distribution, but we’re not there yet. Boggis: There’s a discussion going on in some markets, such as Singapore and Hong Kong, of having a government or quasi-government set-up which knows everything about you and consolidates it into one box, as a sort of passport for finance. You can buy any product online because you have this trust key. If all the markets do it, you could sell cross-border as well. There are a lot of other things to consider before that happens, but this technology could affect distribution. To the point about pop-up ads – that’s very lifestyle-orientated. Advertisers can latch on to the fact you looked at a car, or you like dogs. It’s harder to tuck into what your financial situation is. It’s quite a wide subject matter.  Mittal: The point about a financial passport has to dovetail with things such as biometric identification. As that becomes easier, the regulatory environment changes. But today we’re still some way from using technology in that manner. I mean, we all have IT people; we don’t necessarily all have CTOs [chief technology officers]. Maybe that’s what we should have – and CTOs who actually come from the likes of Google who have innovation and user-experience hardwired. Tang: It depends what your focus market is. If you target institutional clients, who only really care about the risk-adjusted return, you’re better to invest your technology in your investment research process. Your goal should be the Apple iPhone’s convenience. If you give a solution to people looking for convenience, you’ll always be there. You have to think about product development and consistency, risk-adjusted return and a great investment process. Alipay gave a big shock to the Chinese asset management industry, but it’s not a new thing. Over 20 years ago, when I was in the US, I got my first money market fund with Fidelity and could use an ATM card linked with my money market fund. In China, they took this old idea and linked Alibaba with a money market fund. A lot of people ask me, can you replicate this kind of success out of China? I say, definitely not. Different jurisdictions have different regulations for asset management. Second, just like the mutual fund linked with Alipay, the structure is totally different from the international standard. Yip: Comparing with banks and insurance companies, asset managers lag behind in using technology. There is a lot of room for development by making use of these tools and new channels. Big data allows asset managers to better understand the investment needs of investors and their profiles. It can be useful to create new investment solutions. In general, asset managers still rely on traditional ways to reach out to investors, like via intermediaries and advertisements. It is not sufficient and lacks customisation. Funds Europe: Is the expansion of Chinese asset managers in Asia going to be a game-changer in Asia? Tang: I hope so! There are three major trends happening between China and the rest of the world. First is the internationalisation of the renmimbi. If you ignore that you will miss a trillion-dollar opportunity in the next two decades. The second trend is this trillion dollars won’t just stay inside China. Although more and more wealthy people in China feel comfortable to open a big account with Bank of China or ICBC, they’re still looking, through their accounts, to invest millions of dollars in assets outside China. The trend is picking up right now. The third trend is China is a highly capital-controlled economy and right now the door is gradually opening. No matter whether you’re a pension fund or an asset manager or a sovereign fund, you are either not allocated or way under-allocated to Chinese assets. Vervoorn: From an investment perspective, the answer to this question is yes, and there are a trillion arguments for it. Investors’ allocation to China is ridiculously low if you look at the size of the China markets. This week the renminbi was the fourth most traded currency, which is not yet reflected by the use of the currency as an investment currency. But if you look at the Chinese asset managers going into Asia, is that going to be a game-changer? Again, yes. They’re not coming alone. Chinese distributors are expanding in Asia (and beyond) too. In the list of the biggest asset managers or fund houses in the world, the Chinese are moving up the ranks every year. They have such a strong and big home market they are able to operate very efficiently, which can benefit them in setting-up business abroad.  Mittal: China is an under-owned market, from international investors’ perspective. And it’s an extremely important market. Interest rates are going down, the renminbi is no longer a one-way trade, and with the opening-up of the markets, there’s more money that’s going to come out of China as well. Does that benefit only the Chinese asset managers? No, it’s a game-changer for global players as well, in terms of how we position ourselves there. The Chinese players have a big home market, so that gives them scale domestically. But it’s yet to be proven whether that can be replicated and exported to other markets. One of the biggest challenges in China today is scarcity of talent and the cost of talent. That has, hopefully, got a little cheaper over this year. The volatility of markets has meant people aren’t setting up a hedge fund every second day. Boggis: Is the expansion of China going to be a game-changer globally? Yes. All of us will be either positioned in China or looking how to position. Of course, the issue of China has been access. And a bigger issue people talk about less, but we certainly think about, is, even if you’ve got access, what can you access and how much in-depth detail can you get on that asset? However you cut it, the assets have not been through a visible cycle. A lot of these are new companies, so you don’t know much about many of them. Given the market has a lot of government support, even then you might not see the true nature of the beast. It’s going to take time for China to become more attractive to overseas investors. In terms of the Chinese asset managers, they’re well set up in Hong Kong already and have been for some time. Some of them are trying to build their own businesses, with offices in London trying to build a global franchise. Some will be very successful. Others have teamed up with other fund managers. For example, we’ve had many people talk to us – sometimes that works, sometimes it doesn’t. There’s still this quite heavy reliance on the suggestion of a quid pro quo: we’ll work with you if you work with us. The problem for someone like us is we have our own fund management business. How do you meet in the middle? Yip: It will be a gradual process. As China is opening up its capital account and Chinese capital market is getting more important, there will be an increasing need for Chinese investments from international investors. It will help boost the growth of Chinese asset managers. In the meantime, Chinese asset managers are becoming more sophisticated and internationalised by setting up offices in key markets such as Hong Kong or setting up offshore funds domiciled in Luxembourg. Also they have better understanding of global investors. This can pave the way for international development and targeting international investors. The expansion of Chinese asset managers will support the industry’s growth in Asia. Funds Europe: In Asia, retail distribution tends to be restricted to a number of large well-established distributors in each market. Do you think this will change in the near future? Boggis: It has changed, to some degree. Banks were dominant in Hong Kong and Singapore and they’ve lost market share to insurance, possibly to asset managers directly in some cases. Banks themselves have had changes internally. Regulation and compliance have caught up with them. If you are a UK bank, your practices in Asia need to conform with what’s going on in the UK, for instance. Vervoorn: Technology will play a big role here as well. There are lots of regulatory requirements, like for ‘know-your-client’ procedures that will impact the development of different kinds of distribution. Overall, technology is going to increase transparency. Which not only benefits investors, but potentially also providers; if you have a good product, it will be more visible. Mittal: Distribution in Asia seems homogeneous, but it’s not. It’s fragmented in each country. Hong Kong and Singapore you could probably come close to bucketing into one. A couple of distributors dominate those markets. But in Japan, China, Korea, Indonesia and India, it’s completely different. Regulation is becoming more of an issue. An example is Taiwan. The regulators are putting in place more and more restrictions. Technology is going to be the next differentiator, the one that changes the game for some of these players. But beyond that, the big players in the respective markets will remain dominant for a period of time. Tang: Near term, it won’t change. For the intermediate to long term, the answer is yes. With technology, you’re looking to Alipay, and even right now they have another similar feature from Tencent. Whether you like it or not, you have to look at the young generation in the subway or in the street. The time they spend on their mobile device, you can’t realise. It’s a very important component of their life. Funds Europe: How important will the private banking and wealth management distribution channels become in the years ahead? Tang: We have been working with certain US private wealth management firms and private banks. My experience is they have too many choices, and for a small firm like us, I would rather focus on institutional clients. I would rather team up with Tencent and Alibaba than a private bank if I had the choice. Boggis: There’s a mixture of entities within private banking. Some buy lots of funds, some hardly buy any funds. The trend is for them to buy more funds over time. So private banking is important. Wealth management is quite a wide zone. It pretty much covers everything. If we’re talking about intermediation, I suspect the incoming technology will have elements of wealth management and advice inside it, so it will be a challenge to the private banks’ business model. Perhaps the higher-end private banks, where they have the ultra-high-net-worth clients, will thrive if they offer very good advice. The more mass private banking might struggle. Mittal: It’s an important channel and technology is going to impact it, but beta is going to go towards the use of index products. So where private banking comes in is within the alternative space. There are a couple of challenges with private banking. Decision-making is still very European-centric. If there is a shift to empower other regions more, that will help managers in Asia. Yip: Many recent reports have shown a continuous increase in Asian wealth and the wealth management sector has reported significant growth in terms of assets under management and headcount over the last few years. There is an increasing demand and private bank and wealth management firms strive to improve their infrastructure, increase resources and establish deeper understanding of investors. They are more sophisticated with more comprehensive services. Product-wise, they provide a variety of investment choices and tailor-made investment solutions to Asian investors. I believe this trend will continue. However, the market is becoming more competitive and the costs are getting higher. So firms which run well will become stronger in the market. Those who are willing to put in resources, getting more sophisticated and offering more tailored solutions, will be more competitive in the market.  Funds Europe: What is your outlook for the growth of pension and insurance investors in the years ahead? Vervoorn: For me, the big dynamic for pension and insurance investors is targeted investments, in terms of target return and set investment horizons. Pension and insurance companies are well positioned now to offer solutions in that space. They will be the first to benefit from a further growth of pension and insurance investors. Boggis: Asia, generally, is under-represented in pensions and insurance. Asia is looking to grow its consumption, on a secular basis. In China, you’ve got these new enterprise annuities coming. It that like a 401k? I’m not sure, but basically you’ve got huge potential growth in pension and insurance. The question is how to get those flows to come to us, as asset managers. Someone mentioned insurance companies might have their own asset management companies and they may outsource. However, there’s also a trend for them to capture it all themselves, which is not helpful for some of us. Products you can bundle under solutions for a target return or result with a certain level of volatility are going to be the growth area in the next five years, possibly ten. I also hope and believe it will be about active solutions which may have some passive elements. The challenge is that passive investing, as an industry, has outperformed over the last few years because of the nature of central bank intervention. Mittal: The domestic markets in most of Asia are too small for the asset classes insurers or pension funds might need to invest in. And the growth in these two industries is huge. Look at insurance penetration around the region. It’s still in single digits and growing. There are lots of changes going on in pensions. Australia has led the way, Korea is not far behind. China is coming along as well. The opportunity is large and the opportunity for asset managers is significant. Tang: We are one of the Chinese asset managers to manage money for the NSSF [National Social Security Fund]. Because of that, I have spent tremendous time with the top management of the NSSF for the last two years. And according to the conversation, even for the Chinese social security fund itself, they are way underfunding. The potential for pension fund and insurance in China is tremendous. Funds Europe: In broad terms, what is your level of optimism for the industry over the next two to three years, and why? Vervoorn: I’m optimistic about normalisation, especially if it means active managers are able to add value to clients’ portfolios. Government intervention over the last few years was not really benefiting us. I hope it’s changing. Boggis: Optimism is high, especially in Asia, but it won’t be an equal opportunity for everyone. You need to understand what markets as a fund manager you’re trying to penetrate and what products you offer to that market. For investors, it’s important to understand what’s been going on in the world for the last seven years and place bets accordingly. It’s a time for optimism, but you need to be careful and not get carried away. Mittal: There is a lot to be optimistic about in Asia, given the dynamic, non-homogeneous, innovative sort of solutions we’ve been talking about. We’re also in a challenging environment. The interest rate environment is very low. Whether we get a Fed hike or not, the equity markets have been at an all-time high. Investors’ needs are at levels that were pre-baked before the financial crisis. Getting used to lower returns and higher volatility over the next few years is something we will have to navigate. Tang: I’m optimistic because we are at the bridging point between China and the rest of the world. Asset managers in Hong Kong or the Asia-Pacific region have a tremendous opportunity to grab. The world is changing because of innovation, digitisation and the internet, so this also can also be an opportunity for some. Yip: Yes, I’m optimistic of the future development. Firstly, Asian wealth keeps growing and there is an increasing demand for investment products and services. Secondly, many households do not invest a lot in funds and there will be room for development as investors realise the importance of maintaining and building wealth. Thirdly, an ageing population drives retirement needs. All these drivers generate the demand for wealth management services and mutual funds are important tools which are common in many markets. There will be room for growth and development. ©2015 funds europe

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