Armin Choksey and Conal McMahon of PwC in Singapore say 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 Asian Investment Fund 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 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.
Faced with a low-interest rate, high-volatility environment, many investors are seeking income-focused products. In response to this demand, asset managers 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 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. Concurrently, the focus on green financing stems not only from its vast potential but also from the increasing prominence of environmental concerns.
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 announcing its intent to invest in ESG-focused green bonds from 2020.
Other government-backed institutional investors are expected to adopt similar standards to the fund, or base their own off them. 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.
Hotbed of opportunities
The opportunities across Apac are as varied and diverse as the languages, peoples, cultures and nations that comprise the region. This leads to a hotbed of opportunities where there is truly 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 retirement savings, alternatives to chase higher returns, or environmentally focused products to spur sustainable and green projects. Whether local, regional or international, asset managers are finding their products increasingly in demand.
These same asset managers find themselves having to balance these opportunities against changes sweeping the industry, such as investors who are 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. Whilst banks continue their distribution dominance in some markets, other markets are poised to leapfrog these legacy channels and have digital distribution as the main channel for product selection, especially among mass-retail investors.
Asset managers are also assisted in reaching their Apac objectives by market and regulatory developments. 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, remove ownership limits, and countless other initiatives to promote the growth and development of asset and wealth management across Apac.
Thus, whilst there is still ample volatility and uncertainty in markets to make traders and brokers jittery the world over, the trends witnessed in Apac across 2019 should give asset and wealth managers a sufficient boost to see them in good cheer as they ring in the new year, and hope that regulators and investors alike continue to provide the framework for them to seize the opportunities on offer.
Armin Choksey is leader and Conal McMahon is senior manager at PwC’s Asian Investment Fund Centre
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