Hong Kong roundtable: Crouching opportunities, hidden risks

Our line-up of experts looks at how the Asian asset management industry is faring compared to its global counterparts in terms of diversity, technology and the market risks that make managing a portfolio challenging right now. Chaired by Romil Patel in Hong Kong.

Rex Lo (managing director – business development, BEA Union Investment Management)
Marco Tang (head of advisor business, Greater China, Investec Asset Management Hong Kong)
Kylie Chan (head of wholesale and retail sales, Hong Kong, Natixis Investment Managers)
Marie-Anne Kong (partner and asset and wealth management leader, PwC)
Amy Cho (chief executive for Hong Kong and head of intermediary, APAC, Schroders)
Dr King Lun Au (president, Value Partners)

Funds Europe – Looking at the markets at present, what do you feel are the risks we’re facing and where do you think the upsides are at present?

Kylie Chan, Natixis Investment Managers – The most visible market risk is the tensions between the US and China, which leads to thoughts about increased protectionism. Now a tweet drives sentiment on a day-to-day basis, which was unseen in the past. I am more concerned about the fear of recession, but it’s difficult to predict when exactly the recession will kick in. A recession is not our base case, but if the fear becomes too strong, it will become a self-fulfilling prophecy, so in that sense it’s prudent for investors to adjust their portfolios. The risk is they become too conservative, which may lead to some missed opportunities in the market.

Funds Europe – We have seen the fear of recession being exacerbated by the US yield curve inversion, and also after a decade of a bear market.

King Lun Au, Value Partners – Yes, and that is a very reliable indicator, the yield inversion, because at least on record it has been a very accurate predictor. There was one in March – the first time since 2007, even though it was just for a short time. The problem is that central banks have become addicted to quantitative easing; that has distorted the capital markets for a very long time, so somehow inversion will always happen. That is part of the reason for the uncertainty around whether we are heading into a recession or not. Everyone thinks central banks will bail us out, but they are running out of tools, and also geopolitics is becoming more intense and more global, so there are a lot of hidden risks. From our clients’ behaviour, they have been de-risking, becoming very conservative, but they are also concerned they will be missing out if interest rates were to come down drastically again.

Amy Cho, Schroders – Investors are de-risking. But it’s interesting to see that they want to stay invested. They don’t want to risk missing out on the upside, yet there is so much uncertainty, especially on the geopolitical front.

Marie-Anne Kong, PwC – We have experienced a number of crises before, especially in Asia. There was the Asian financial crisis, then SARS and then the global financial crisis, and this is yet another one. However, each time it has been a very different crisis. If you look at history, obviously there are uncertainties and issues, but in my experience, there is always an asset class that will come out on top, even in a downturn. It’s a question of who can design that asset class to meet the needs of investors. I see the full spectrum – not just on the retail side, but also the alternatives. Alternatives potentially have a big role to play because in a downturn, that is where people are looking for absolute return and trying to capture the upside. Private credit is an area where we will have a lot of potential upside. We are already seeing a lot of activities in that regard. It’s a question of meeting the needs of investors. They want to stay invested, but in which area?

On the risk side, liquidity risk management is a key focus. If we look at Hong Kong, more than 60% of the assets under management (AuM) are sourced from non-Hong Kong investors, so we’re very dependent in terms of that flow from outside the region. Liquidity issues outside of the region could easily flow into our region and this is an area to pay special attention.

Rex Lo, BEA Union Investment Management – Right now is a very challenging environment to manage the portfolios. Last year everyone was talking about rate hikes, but since the beginning of this year, people are talking about rate cuts. Our clients are demanding more in terms of performance on managing risk. Last year we did a good job on managing the downside risk, but this year we had a difficult time in catching the upside. All these feedback loops of trade wars, rotation of trade wars, market fear and the fast policy responses are challenges. On liquidity, the Asian fixed income market tends to be less liquid compared to the US and others. If you want to change your strategies, your duration management and so on, it will take time; hence, we have to put extra effort in to deliver alpha.

Marco Tang, Investec Asset Management – I agree completely. Partly because fixed maturity product (FMP) is selling like hot cakes, but most of the underlying securities is in emerging markets debt. Given the global economic uncertainties, the chance for a bond to default is theoretically going up. So, late joiners of this FMP have to maintain a yield to make the product attractive, which means potentially going for something riskier. In addition, if it’s a buy-and-hold strategy and one bond goes wrong, then there’s a significant chance of missing investors’ expectations. We see most of the fixed income or the FMP selling well, but it’s because some of the distributors offer investment financing – basically gearing up the investments. It may not be an immediate risk, but it seems the risk level is piling up a little bit.

Au – For institutional clients there is a lot of smart money going into A-shares, because they see this as a long-term buying opportunity. A-shares inclusion is one and valuation is the other. On the mass retail side, you have the problem of investors wanting return and liquidity, and in the fixed income market we are forced to look at Asia, and at emerging markets to some extent. If you look at the whole investment universe based on our analysis, 24%-25% of the global bond universe has negative yields. If you look at yields that are more than 5%, they are more or less all in Asia, and that accounts for 3%-4% of the overall universe. There is this high concentration in A-shares, so there is always risk and opportunity.

Cho – In a way, retail investors may not fully understand the dynamics of private assets. In addition to yield, are they conscious of the risks they’re taking?

Going back to FMP, generally there is a concept of buy and hold. Primarily it’s a low-turnover portfolio – trying to build a portfolio of securities and have more or less the same maturity, but that doesn’t mean that the portfolio would remain the same throughout the term of that product. Different markets and segments are using it very differently. The private bank and private wealth channels as well as high-net-worth individuals often use investment leverage, so FMP would sit well within their portfolios. But for the retail market, predominantly cash depositors, is FMP an optimal alternative to cash deposits?

Au – Technology is also a very big point. FMP is a good example – originally it was more of a private banking product, and now it’s moving down the food chain to the retail market. We may see other high-end wealth management products being packaged for the retail market, especially with the advance of technology. Looking at China’s wealth management market as an example and a lot of these absolute return or target return products, behind it there can be a very complex portfolio but they managed to turn it into a retail tranche. Risk management is very important, and that’s why the regulators have been tightening up on that. With the introduction of virtual banking in Hong Kong, we may see a push towards those so-called goal-oriented products.

Cho – Yes, technology is not to replace the human touch, but to facilitate it. We want end investors to take charge, but how? Digitising the investment journey will help, just like online shopping, which we could do 24/7. At the moment you cannot do that for wealth – you have to speak to an investment consultant during office hours. Technology will also help bring us to the state of financial inclusion, so everybody will be served. Today, client segmentation is primarily by asset, by AuM.

Down the road, it should be segmented by investor behaviour in addition to AuM.

Au – That’s what online distribution will eventually drive – the market to us.

Lo – Moving forward, there will be more people using the platforms and mobile banking to trade funds. As Amy mentioned with online shopping, we all do it and started with something small and bought more as we got used to it. It takes time to educate. When it comes to investment, you start with a small amount, say a monthly plan, and as you get to know more about funds, you invest more. Twenty years ago, in Hong Kong the fund market was more prosperous than now in terms of product types and so on. Back then, people were keener on buying pure equity funds such as theme funds, country funds, regional funds and different styles, but now the products are getting very homogenous. With the regulatory requirements, it’s different for the banks to promote creative products and therefore investors don’t have exposure to new products and new ideas.

Au – The main problem is whether we can adopt a portfolio approach to risk assessment. At the moment, a lot of distributors have this binary approach, but some of the banks – at least some of the private banks – are adopting this portfolio approach, and hopefully that technology or concept will sooner or later be adopted by retail distributors.

Chan – Technology is a solution to all of this – it enables providers to reach more clients in a shorter time and at a lower cost. In the past, because of liquidity risk and market changes, it took a long time to communicate to the front line and then to the end clients, but with this online platform and digital solutions, the flow of information is much faster to more people. Education helps in case of market volatility and portfolio approach: you can just fill in a few questions and then you can have a portfolio suggestion.

Cho – There is a fundamental difference between investing into funds and online shopping. For online shopping, goods can be returned. When investors are taking charge, they need the know-how and to be responsible for their decisions.

Au – Kylie brought up the shape of the industry going forward. Right now, a lot of us rely on B2B, but online distribution will change that and so far, we are not seeing much progress in Asia, unlike the US, where robo-advisory, for example, is quite popular. I believe there will be a hybrid approach in Asia, because it is so compact, and it’s very easy to visit the bank branch. The younger generation never visits branches, but nevertheless banks have the advantage of offering all-to-all service, online and offline.

Also, it may have an impact on the kind of products we offer. The younger generation is interested in investments, so education is important, but so is providing the type of products they want. They don’t have much money, but they do understand that they need to invest for the future and nowadays they want instant gratification: they open the app, and they want to know it’s up. That will change the way we design our products, and we may see even more distinctive client segmentation. For the higher-end clients, we need to have more product differentiation, because a lot of these products will become commodities. Already we have zero-fee ETFs, in the US a small boutique manager even offered to pay their clients for managing their money. The industry will be under a lot of fee pressure, so we have to offer value-added services to our clients.

Cho – There is so much attention on fees because we are in a low interest rate, low growth, low return environment. If investors can generally expect a high double-digit return, they don’t mind paying a 1.5% fee. But if the return is low, they are more mindful about fees, because they look at the net performance. On the point about service, for asset managers, the key is how to better engage and service end investors. Products remain important, but there’s more we could do. We find ourselves increasingly focused not just on product creation or new asset classes, but on how to reach out to end investors. Whilst asset managers are good investors, we may not necessarily be best placed to serve end investors. We need to work with our intermediary partners to get closer to end investors, and technology is a very cost-effective means for us to do so.

Kong – When it comes to technology advancement, all eyes are on Asia. Emerging markets are benefiting the most from digital transformation because they have no baggage and no history, so they have the ability to shape their markets with the latest technology. Players in the region are able to think outside the box and say: ‘What is the best way to reach out to that market?’ They don’t need to go through the traditional route, whether it’s banks or IFAs. That’s why more than two-thirds of funds flows in China are sold via mobile apps.

Funds Europe – Looking solely at the Asian market, do you anticipate any changes in the dynamics of market and investor needs?

Chan – Partly because of changing demographics, millennials are getting richer and they need wealth planning services. When they invest, they want to attach a certain mission to it – what they exactly want to achieve. In the past few years, ESG [environmental, social and governance] investment has grown a lot, especially in Europe. But honestly, we haven’t seen a significant growth or pick-up in terms of interest in Asia yet. That’s something we want to see.

Au – It’s not just the young generation, institutional investors are also asking for ESG, especially the European investors – and even regulators are now looking at it.

Kong – And sovereign wealth funds. They make up the biggest share in active engagement on ESG – certainly from an Asian perspective. The trend we’re seeing is driven from a policymaker perspective, so each country is designing their own policy and it’s gradually filtering down. It is the investor who has the biggest power, so a sovereign wealth fund who can readily take action from a policy perspective is a big mover and shaker.

Chan – Yes, policies definitely help to bring awareness so it will take some time and education again for the investors, because investors’ demand is crucial to drive growth.

Cho – In terms of development, ESG is getting more and more attention in the West and is now spreading to this part of the world. If we look at the Principles for Responsible Investment, less than 15% of the signatories are from Asia, many of which are from Australia and Japan. And we can expect more companies from the rest of Asia to take up ESG. ESG is an up-and-coming investment focus, and asset managers can help improve awareness and adoption amongst investors in Asia.

Chan – In terms of ESG, there are a lot of myths, and one of those is when you are doing good, you cannot do well. From a regulator’s perspective, a government perspective, they can promote policies to raise awareness, but from the industry it’s also important to do more in terms of education, while doing good. It is not only dedicated ESG strategies that will become more mainstream, but even traditional investment strategies are also seeing greater integration of ESG factors into the process as well.

Au – On the distribution side, we are seeing more platform players coming into the region due to cost pressure, so a lot of banks decide that it is better to outsource KYC [know-your-client] fund administration to these platform players. That may change the way we interact with them, at least on the administration side. The other change that will have a big impact on us – at least in Hong Kong – is how the China market evolves and whether it will open up to allow more domestic saving to invest overseas. We definitely envisage benefiting from the A-shares inclusion, at least on the institutional side.

Funds Europe – Do people trust the funds industry and what needs to be done to improve this?

Kong – In this region, funds are not as prevalent as in North America and Europe – for good reasons. One is investor education – it depends on the maturity of a country and level of financial literary, but it also comes back to pricing. We recently did a paper on fees across the industry, how they have evolved, whether there is a pressure, what’s the implication on margin and so on. Generally, in Asia, pricing is relatively higher. There is more competition in the more mature markets and hence it drives down the fees, whereas in Asia to some extent the industry can still command a certain level of premium, so fees are relatively higher.

The other aspect is the culture, because most people like to trade for themselves, and funds are seen as costly as there is an additional layer of costs. We expect greater transparency around pricing going forward because the regulators and investors are pushing it.

Cho – I am of the belief that investment management is a trusted industry. How we can really improve the penetration comes down to investors’ comfort level with the fund industry. Regarding the pricing model, it includes a couple of other entities as well: the auditor, trustee and administrator fee. Fees are on a downward trend thanks to technology. Of course, fees are going down possibly also because of competition. Virtual development will be a driver to trigger incumbents to more seriously look into the fee structure.

Lo – I agree that the people working in asset management are trustworthy. In Asia, it’s evidenced by the growth in AuM in passive and active products. In terms of product launch, it would be difficult to see a big take-off if we keep pushing products. We have been doing it for the past 20 years so this won’t see big growth. Discretionary portfolio management (DPM) portfolio-based solutions will be the next wave of the growth. It depends on how people get used to the portfolio-based idea. That means, as asset managers, we are going to talk to DPM managers or fund of funds going forward. These people are professional, and they will look into whether it’s justified to give a management fee to an active manager who can give alpha, or whether to put money into an ETF investment. Going forward, that means the competition for asset management will be severe, because people will really look into whether you can deliver alpha or not. That will create consolidation and so average managers will fade away soon.

Au – Fee pressure is an interesting point. Pricing is a bit more regional than other parts of the world, partly because of the behaviour of investors here – they are more trading-oriented, more return-driven. So, in a way they are willing to pay, but they also have a very short-term horizon – if you don’t deliver, they switch to others. That behaviour is very unique to Asia, to some extent.

Cho – Yes, and also because of the remuneration model between asset managers and the distributors. It is primarily a fee-sharing model, where an appropriately designed fee level is essential to provide adequate incentive to distributors and also in the interest of end investors, besides managers’ own commercial interests.

Chan – There are increasing disclosure requirements on a regulatory perspective, and that helps to build more trust within it. In addition to regulations, the industry as a whole can do more to build trust. Altogether, we have been trying to increase the transparency, and getting closer to investors is also helpful.

Funds Europe – The funds industry is seen as male-dominated. Is this your view and do you see this changing?

Cho – Not at all. The Asia funds industry is indeed more diverse, and you tend to find it more female-dominated in some markets. Better access to domestic help has unlocked the female working population and facilitated diversity in the workplace to a good extent.

Chan – We have extended families, they are close to each other and that helps.

Lo – Women have always been in the workforce in Hong Kong.

Kong – I have always operated in a male-dominated environment, so I take this as normal. Some people choose not to progress their career for personal and family reasons, so I don’t think that this is necessarily a significant issue here.

Tang – It’s much healthier now than when I joined the industry 20 years ago.

Cho – I think diversity in Asia is good.

Funds Europe – Looking ahead over the next three years, how do you see demand changing and what new developments do you expect? And if there is one thing you would like to change about our industry, what is it?

Tang – When I joined the industry, we used PowerPoint and 20 years later we still use PowerPoint, but in a different format. There needs to be a better way for an information path.

Lo – We set up a Wholly Foreign-Owned Enterprise (WFOE) in Shenzhen, and back then we decided to make this move because we had a vision of the Greater Bay Area idea, and we believe, in the next few years, this idea will come in a more material way. Because of the proximity, the residents in this area are more familiar with the products in Hong Kong. I think the development will be quite big.

The next things I want to see will be more talent in the asset management industry. When we set up our office in China, we need to hire people from the front office to the back office. We find it’s very difficult to hire people with sufficient experience in asset management. In China, because the industry is in expansionary mode, asset management companies hire a lot of people, but the talent pool is small now, given the industry’s development in China is relatively short. That creates a lot of opportunities for talents from mature markets such as Hong Kong or even Singapore, because of the language advantage, so I see there being a lot of integration in terms of human resources.

Kong – We want the talent to serve the industry to grow in China, because of the fast pace of growth, it’s almost like musical chairs. Everybody is recruiting, and they keep moving from one organisation to the other. From a Hong Kong perspective, the government is committed to growing the talent pool for the industry and has earmarked funding to try to bring up talent, but it will take some time before we see the benefits.

Does the industry do enough to upgrade its profile? Not just in terms of returns – everybody focuses on returns because the investors demand that, but investors care more now in terms of what good is being done for society and the long-term prospects.

The challenge is whether the society is leaving a good world behind for them. Millennials think more like that and there is an opportunity for the industry to shape important issues such as climate risk.

Au – China is going to change the industry in the next three years. Coming back to technology – it will change the way we create our products, maybe not in the next three years, but definitely further down the road. We need simplicity and liquidity.

That’s what technology will bring – it will change the investment behaviour and not just for the younger generation, but ours as well. That will change the way we look at investment products further down the road, especially with the introduction of virtual banks.

Cho – We talk about changes, the traditional model must evolve, and that evolution will be quite drastic in the next three to five years.

We want to leverage on the investment expertise that we have around the world and the global distribution across a broad spectrum of jurisdictions. One of the major changes I hope to be seeing is regulators (in Europe and Asia) having better alignment of objectives. That will be very helpful to the industry as a whole.

Chan – In the past, the industry as a whole has done a very good job in bringing different investment strategies or solutions to high-net worth clients. Historically, those solutions have only been available to institutional clients, and now they are available to high-net-worths, so, for example, alternatives, liquid or illiquids. But access to these products for retail clients is quite limited. That is for good reasons: understanding, knowledge, sophistication, complexity, but alternatives is an interesting example because it is a broad asset class. There are aggressive, volatile strategies targeting very high return potential and there are also alternative strategies aimed at mitigating downside risk. For the mass retail market, choices are limited. If there is a way to grant them more access or choices, it would be very helpful for retail investors to build portfolios to cater for different market scenarios.

©2019 funds europe



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