Adding more people to back offices as investment fund volumes grow is not a long-term solution because labour costs in Asia are starting to rise, argues Euroclearâs Carlo Minieri.
Access to new local Asian market investment opportunities will be marred by high costs and risks if the capital market infrastructures in these areas do not move to automate fund transaction processing.
The argument that cheap Asian labour costs negate the need for fund distributors to automate is wearing thin.
There is always a tipping point and, in fact, labour costs are starting to rise in the region.
Automation can help channel the region’s wealth into foreign and domestic investment funds. For cross-border fund flows, automation means being able to make it financially viable for non-Asian fund managers to operate successfully in the area.
Getting distribution right is vital to achieve critical mass.
Automation goes a long way to avoiding concerns such as: Will the manual handling of fund orders – and their reconciliation – lead to hefty market claims? Is it worth trying to tap into a local investor base if there are abnormally long settlement cycles or delays? Given the small ticket sizes of retail orders in some Asian markets, if manual processing costs eat away most or all of the asset management margins, is it right that a foreign fund manager does business in this market?
Recently, there are examples of large European fund managers entering growth markets such as India and exiting shortly thereafter. Finding an abundance of wealth potential is one thing. However, under-developed processing practices can turn into costly misadventures. More automation, particularly from the distribution side, will lead to more opportunities for them to invest.
There are good efforts taking place to promote greater levels of automation in investment fund processing. But it takes time and is often implemented on a country-by-country basis.
Despite the work of the Asian Fund Automation Consortium, among others, the adoption of automation has been confined to a handful of distributors in Singapore and Taiwan.
One noteworthy exception is the Hong Kong Monetary Authority’s Central Moneymarkets Unit processing platform, which was launched in 2009.
The Korea Securities Depository took a different approach; it linked its domestic fund processing platform, FundNet, to Euroclear’s FundSettle platform. A similar model is being pursued by Taiwan Securities Central Depository.
The strong sense of market co-operation between fund processing experts and Asian central securities depositories is making the long road to full processing automation a reality – one that could maximise trillions of non-captured wealth.
By some estimates, there is $14 trillion of private wealth in Asia, excluding Japan. Yet less than $3 trillion of this is invested in financial instruments.
A rapidly growing Asian middle class and a new generation of investors in China inheriting “old money” suggests that the region’s capital markets are facing fundamental changes.
There are opportunities for local and foreign firms to help manage this wealth. Economic growth in Asia is also prompting new foreign money inflows.
The recent evolution of the renminbi and the dim sum bond market can be twinned with a maturing mutual fund industry.
Asian economies are also attracting Western investors to explore opportunities, as shown by the success of offshore renminbi investment funds.
According to research firm Cerulli Associates, there were five offshore renminbi funds with less than $800 million under management between them; one year later there were 36 funds with more than $4 billion under management.
The appetite for Asian investors to buy into funds from other regional markets, especially European investment funds, is likely to increase interest in globally sold European Ucits beyond the 15% that Asian investors currently hold.
Carlo Minieri is a director at Euroclear
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