March 2018

SINGAPORE ROUNDTABLE: Small nation, big ambitions

Our cross-industry panel discussed fund passporting, robo-advisers and the potential of a new investment structure, the S-Vacc. Chaired by George Mitton in Singapore. Singapore_roundtable_March_2018 Anshuman Asthana (regional head, securities services, Association of Southeast Asian Nations (ASEAN), Standard Chartered)
Peng-Wah Choy (managing director Asia markets, FundRock)
Zal Devitre (head of private banks distribution and global financial client group, Schroders)
Justin Ong (partner, asset and wealth management industry leader Asia-Pacific, PwC)
Anand Rengarajan (head of securities services, Asia Pacific, Deutsche Bank)
Mark Voumard (founder and chief executive, Gordian Capital) Funds Global – What is your outlook for the regional equity and bond markets in the year ahead? Zal Devitre, Schroders – We are optimistic about equities in general over the medium term, and do hold a positive view on Asian equities. Trade in the region is robust, corporate earnings are strong and on a relative valuation basis, Asia remains attractive vis-a-vis other regions such as the US. In regard to fixed income, valuations have run up recently and we would recommend flexible, unconstrained ways to access the asset class. Dissecting the Asian fixed income market, we prefer local currency versus hard currency bonds. Mark Voumard, Gordian Capital – For the first time in many years, we see globally synchronised growth as well as corporate earning strength and relatively tame inflation, which will push equity markets higher in 2017. There will, however, be the occasional setback, perhaps around US political uncertainty, US interest rates and geopolitical risks. In emerging markets, Brazil, Russia and India will probably do quite well this year. China had great GDP growth last year and will probably slow a little bit this year. In Japan, the Nikkei is at a 25-year high on the back of Shinzo Abe’s re-election as prime minister. After a long period, the reforms, loose monetary policy and a weaker yen boosting exports helped the Japanese economy grow for seven consecutive quarters. That’s the longest period since 2001. We expect more of the same in 2018 with structural reforms, consumer-led growth and positive earnings momentum supporting equity valuations. Anand Rengarajan, Deutsche Bank – There is still a lot of impetus for Asia and the inclusion of China A-shares in the MSCI Emerging Markets index will be a significant event. A lot of investment managers are getting prepared for that. India and China continue to post growth upwards of 7%, which is unknown anywhere else, so people still want to have a slice of these markets. The ASEAN [Association of Southeast Asian Nations] belt is also beginning to pick up some interest. The fixed income market will depend on a couple of factors, such as US interest rates. Anshuman Asthana, Standard Chartered – If we reflect back, in 2017, there was a view that as economies of OECD markets start to grow, there would be a realignment of capital from this part of the world back to the West. That did not happen and doesn’t seem to be happening even now. This year, our view, echoed by our clients, is that there is going to be a good overall global growth rather than sectoral, regional or thematic growth. In terms of potential shocks, there are a few elections happening this year, in India, Indonesia and Malaysia, for example. These might change sentiment overall. Peng-Wah Choy, FundRock – There will be shocks in the market. All it takes is one event and it gives an excuse for people to take a check and consolidate. There could be a domino effect to a larger correction than necessary. That’s where I’m more concerned, rather than the growth. Justin Ong, PwC – My sense is that markets are going to probably taper off a little bit. Brexit is going to come into play in the first quarter of 2019. By the time we hit December, I suspect a lot of people will start to play safe, because you just don’t know what’s going to happen. Funds Global – The Monetary Authority of Singapore (MAS) has sought to champion financial technology (fintech). What types of fintech have most potential to affect the funds industry, either positively or negatively? Ong – The kinds of technology that will make an impact are those that affect the front office, in terms of helping asset managers make their decisions in a more timely fashion, such as data analytics using unstructured data. These technologies could change how people use data and how they apply data to make investment decisions. That’s where the machine learning and artificial intelligence are key. On the back end, there will be progress where technology helps make processes faster and better, for instance on settlements. That’s where the pain points for managers and providers will be. If technology comes in that helps to simplify the process, that could have a big impact. I’m not a believer in robo-advisers as a mainstay. I think they are over-hyped. It’s going to be a long while before we see something big happen in that space, in this part of the world. Asthana – From a service provider perspective, we see a number of technologies which can help how we do things. There are several activities as mundane as, say, instrument pricing or KYC [know-your-client] processing, where, right now, each service provider has its own infrastructure. In a country like Singapore and wider in the region, there is definitely an opportunity where the MAS and other central infrastructure providers can play a role and harmonise these activities. Choy – In Singapore, it is good for the industry that the MAS drives a lot of those initiatives, because we are competing with the rest of the world. In the Asia time zone, Singapore has aspirations to be the centre of the fund industry, but you have to question whether it is, and whether it will be, simply because it doesn’t have the China hinterland, and the regional ASEAN markets are smaller and more fragmented. For MAS to step up and host the largest fintech festival in the world last year here in Singapore is testimony to the regulator. They are not just thinking about tomorrow but about much further into the future. Voumard – I think the concept of the regulatory sandbox is fantastic. I believe Singapore was the first in Asia, but now Australia, Hong Kong, Malaysia and even Thailand are all getting in the picture. To allow evolving financial technologies to operate in a closed space is a great idea. I’d agree that machine learning is further out on the track. Cryptocurrencies, I think, are a bubble. Blockchain technology will be used, but there are something like 2,000 cryptocurrencies in the world. Clearly, they won’t all survive. I agree with the point about robo-advisers. Pure robo-advisers will probably have a small impact, but it will be the progressive financial advisers who use the robo-adviser technology combined with the human touch – they’re going to gain a lot of market share. There was a survey by Accenture that found that eight out of ten Singaporeans are willing to use robo-advisory services for banking, insurance and retirement planning. That’s a significant number. As I was doing a little bit of reading for this topic I came across three interesting robo-advisers in the region. There’s one in Vietnam, a start-up called Finhay, which gives customers the ability to invest in top mutual funds in Vietnam with an outlay as little as the equivalent of $2.60. THEO, which is Japan’s first robo-adviser, operates via a mobile app that allows customers to invest from around $900. The third one is a company called Bamboo, a start-up based in Singapore. It’s a B2B robo-advisory service company, so the company is essentially selling shovels to the miners, which, as we know, is historically often a more profitable activity than actually looking for the gold. Choy – Robo can help the industry by expanding the pie. If you look at household penetration of mutual funds today across Asia, it’s not very high compared to developed markets. Robo could attract a slightly different client base that’s not necessarily being sold to today. If you look at Singapore or Hong Kong, to try to buy a mutual fund through a bank channel, you have to sit through a one-hour product and risk assessment. In contrast, robo is going to reach the younger generation by giving them a quicker solution at a lower cost. Rengarajan – I’ve read a projection that suggests robo-advisers will have $2.2 trillion of assets under management by 2020. That’s a staggering number. Although the market today is negligible or insignificant, it has the potential to go to that point over the next two to three years. As financial market infrastructure providers, one of the most interesting initiatives in the fintech space is robotics process automation. For things like APIs [application programming interfaces], we are already there. No longer are we talking about it on whiteboards, it is here to stay, and we are moving to implementation. Blockchain will have a great impact in some form, but a little later. It’s not a 2018 event. Devitre – I would echo what Anand was saying in terms of robotics process innovation. Schroders has established a centre of excellence here in Singapore that focuses on automation and cognitive sciences. Initially, we are tackling automation of processes that may be more repetitive, such as performance reporting.  We also see asset managers beginning to harness data in more sophisticated ways, whether that be machine learning, artificial intelligence or processing and analysing larger amounts of data. We continue to believe that human plus machine is superior to just human alone or just machine alone, but clearly the machine component is becoming increasingly relevant. Funds Global – What are your views on the Asia Region Funds Passport (ARFP), which is expected to launch this year? Devitre – As an asset manager locally embedded across Asia, Schroders is keen to expand the regional scope of our distribution. ASEAN passporting is an opportunity we are exploring and hope to leverage for business opportunities in the near future. Rengarajan – It will eventually go live later this year, but the whole mechanism still has some challenges, for example the tax treatment. There are a couple of other countries, including India, who are joining as observers, which is positive. An interesting analogy is that we are trying to find unity in diversity. All the participants who want to be a part of it will need to make some changes. You want to retain your diversity and still look for convergence within that. It’s going to be fairly challenging, and that’s what we are seeing. Until some of them make some compromises, it won’t happen. Ucits in Europe took many, many years to develop. Going by that concept, this is probably still many years away for the type of success that markets may expect. Commitments to make ARFP work will be important, as is an enlargement of participants. Asthana – It’s a great idea, great concept, and it’s the largest replication of what Europe did three decades ago. Conceptually it should not be as complicated as it is today, but harmonisation between the neighbours is never that easy, especially when they have different objectives of who wants to retain which part of the business. I understand that Singapore is participating, and we hope that at least Singapore, Australia and Korea can somehow agree to initiate some activities, maybe not as a full-fledged fund passport but something that will allow us to start seeing some runs on the board. Choy – From a regional fund manager perspective, there are a number of players in each market who are not yet global players but who have aspirations to grow. The ARFP creates an opportunity for domestic Asian managers within this time zone who want to expand within the region but are not yet ready to set up Ucits funds and struggle with making a distribution strategy across the 70 countries that accept Ucits funds, where it is not easy to gain traction, scale and all that. But the real challenge here is, what can a Singapore manager deliver, that a Japanese investor would want, that a Japanese manager cannot? The ARFP gives you access to the market, but you still have to do the other things like develop the right capability and products. Yes, it’s going to take time, but it will not take 30 years like Ucits to gain global recognition. The Europeans should consider this as a real threat in the medium term, because this region has growth potential, a large population, significant wealth growth, and if the regulators and the governments in this scheme get together, and if China and India were to jump into the game, it will change the whole proposition. Ong – We’ve been behind this for the last seven years. The whole structure, the format and getting the rules harmonised, that’s all important, but what’s really going to make the difference is the distribution platform. Just having a fast-track approval doesn’t mean your funds get sold. In order for this to succeed, the participant countries need to come together and create a single platform. Can we develop a technology through blockchain, for instance a shared registration of funds across all countries, such that any fund that has been approved under the passport scheme gets put on this platform, gets sold and distributed to any other passport countries seamlessly? Voumard – Historically, Asia has been a very fragmented market. Some of the larger groups have managed to make inroads by setting up costly and separate operations in a number of Asian countries, but the issue is there’s no single common regulatory framework and no common regulator. There’s going to be a lot of resistance to moving towards common regulation. Tax is critical. There will also be competition, because each of those countries mentioned wants to become the regional hub. They’re going to cooperate but at the same time, they’re going to fight for market share. What we will probably see with countries like China, India and Australia is more M&A. If you’re a big player in China and you would like to get overnight success in another market, you will go with your cheque book and buy five or six big players in each of those markets, allowing you to obtain market share overnight. Funds Global – How will the Singapore Variable Capital Company (S-Vacc) legislation affect the asset management industry? Voumard – I’m a big fan, but it’s going to take time. We require clarification on tax. Service providers here will have to get ready to handle the operations. Critically, investors outside Singapore will need to be educated about the new structure. When I get on a plane and visit lawyers, investors and others around the world, some of them don’t even know that Singapore has a domestic fund industry. I have to say that, unfortunately, the promotion of what we have now has been quite poor. At the moment, something like 88% of the money managed in Singapore by managers physically based here is in offshore vehicles. Competition in this area is growing. Hong Kong is setting up its own open-ended fund company regime and Australia is considering a corporate collective investment vehicle. The challenge is to tell the story of what Singapore can offer. Part of the reason why global investors go to the Cayman Islands or Luxembourg is because these jurisdictions are tried and tested. Rengarajan – Even though Singapore is a small country, it wants to establish itself as a regional hub for many things, funds being one. The S-Vacc is a step in the right direction, and complemented by its participation in cross-border fund passport initiatives Choy – This is important for Singapore. Over the years, there has been a push towards having a fund manager base here. You need to have the right corporate structure vehicle or fund vehicle to support them. Asthana – There’s no reason why we cannot succeed. This being Singapore, we will have a much stronger start than most traditional open markets, simply because we have a lot of government-related initiatives to help to get it done. That’s the way Singapore operates. Ong – Obviously, we do believe in it, and I think for all the right reasons. Are there challenges? Of course. What Mark said about brand is important. Last year we went on a one-month roadshow in Europe to promote the S-Vacc as a new and alternative investment vehicle for the Asian marketplace. It was hard. In Luxembourg, Dublin, London and Berlin, most people kind of knew Singapore, but did they know much about the S-Vacc? No. We can’t assume that just because Singapore is well known as a financial centre, that the S-Vacc is going to sell itself. We have to let the world know there is a vehicle that actually works. We also need to make sure that the cost of the infrastructure to develop and run this vehicle remains low, because you’ve got to be able to prove that the costs are manageable. I would also like to add that the use case of the S-Vacc is not only for hedge funds, private equity, real estate or infrastructure funds. We would also like to see it go beyond the traditional uses in the funds world. Going forward, there is no reason why it couldn’t be used in other related industries such as insurance. One of Singapore’s key financial services business strategies is about being the global capital for Asian insurance and risk transfer. It’s a huge market that has a great potential where a vehicle such as the S-Vacc could be used to as a localised domiciliation structure. Funds Global – How does the Belt and Road initiative affect Singapore, and what are the opportunities for those in the funds industry? Devitre – There is a growing interest in thematic funds across the investment landscape. Given its prominence in the news and its association with China’s economic and geopolitical rise, the Belt and Road theme is attractive. The challenge from an asset management perspective is accessing the theme in an intelligent and investor-friendly manner. Asthana – We see a lot of vehicles being created here in Singapore which are dipping their feet into these Belt and Road initiatives. A lot of capital generation activities directed towards infrastructure projects are underway. How will funds play a role in these initiatives? It’s a little too early to say. Choy – Singapore will benefit because of its funding capability and because it is a financial hub of significant size in this region. But if you take that away and look at pure Belt and Road initiatives, I’m not sure Singapore has much of an angle here. Voumard – Development of the S-Vacc to invest in private equity infrastructure funds could be an interesting play. Project finance is reasonably big in Singapore and that could be developed significantly to play a key role in the financing of infrastructure projects. The Belt and Road initiative is a $1 trillion to $2 trillion investment over 30 -40 years. It could stimulate the finance sector, legal, project management and project finance, construction, trading in raw materials etc. For private equity managers, it would be quite appealing to be based in Singapore and visit lesser developed countries in Asia, such as other Belt and Road countries, to search for investments. They can live in a modern city state with world-class infrastructure rather than moving lock, stock and barrel to Ashgabat, for example. Ong – We are extremely bullish in infrastructure. It’s something we started supporting last year, and it’s likely to grow into a significant asset class. Singapore has an opportunity to become a point of centralisation of infrastructure investment vehicles, and not necessarily in equity, but including bond products too. Funds Global – What regulatory issues are occupying most of your time at the moment? Asthana – The Common Reporting Standard (CRS), particularly in some of the markets in ASEAN. In some of the markets, the regulator is still figuring it out, which puts a lot of pressure on us, because we need to provide information to clients. Rengarajan – MiFID II [the second Markets in Financial Instruments Directive] is occupying a lot of time, given that it’s just gone live. For us, the challenge is to balance some of the global-driven regulatory initiatives with some of the local regulations. CRS, for instance, is globally regulated, but different countries have different viewpoints, and getting them to understand and come on a common page can be difficult. Voumard – For MiFID II, the mid to larger managers in Asia are on top of it, but there are many smaller managers who don’t even know what MiFID is, and they’re probably in breach today. In general, the biggest challenge is regulation which either overlaps with other regulatory constraints, or where there’s conflict. The other one that’s coming up is cyber security. We have a Singapore-based, specialised cyber-security firm that does our penetration testing and our board all undergo cyber-security training. It’s a key part of our management focus. Given that the SEC [Securities and Exchange Commission] has focused strongly on this point over the last two years, and all the regulators talk with each other and look at mutual hot-button issues, and US trends find their way to Asia over time, we believe that for the MAS, that’s going to be a big topic this year. Ong – Another issue is the US tax reform legislation. This has a lot of implications for businesses and for assets managed into the high-value companies that have US operations and US taxes. Devitre – I would also say MiFID II, because it has only recently become effective and is engaging our clients’ attention. As a European-headquartered asset manager, we have a good grasp on MiFID II. Choy – The impact of Brexit on the Asian fund industry, assuming the UK doesn’t change its mind. Funds Global – What is the main thing you would like to achieve this year, either at an industry level or in terms of your own organisation? Devitre – One of our biggest priorities this year is pushing further into private assets from a product perspective. We have invested in building out capabilities in private equity, infrastructure debt, private lending and will continue to grow our capabilities in these areas. Schroders also has one of the largest global liquid alternatives platforms, so we are positioned well. Rengarajan – The key for us would be to improve efficiency. In a lot of countries in Asia, a fair amount of stuff is still manual. Some of the areas of development in fintech and industry utilities like funds services in Indonesia help us get more efficiencies than in the past. Voumard – We’re excited about the potential with the S-Vacc in Singapore. We now have a regulated asset management company in Japan, we’re opening a representative office in Shanghai shortly to service the growing number of Chinese clients we have and we’re looking to grow our business in Australia, where we are operating under an Australian Financial Services licence. As mentioned earlier, the use of technology is critical, so we’re going to be investing a lot of money in that space. Asthana – Standard Chartered has, for the last few years, run a transformation programme, particularly on the fund services side, for insurance companies in this region. That’s coming to an end this year and we want to showcase it and start building a client base around it. From an industry perspective, we would like to see the build-up of a funds marketplace, both at retail and an institutional level, with subscription and redemption processes becoming much easier and more automated. Choy – We are detecting a significant growth and interest in managing real assets from an Asian client base. On a personal level, I am excited about S-Vacc because it is a game-changer in the fund industry in Singapore and it fits us into a more global platform in terms of ability to offer an equal, compelling product. Ong – I’m deeply pleased to hear my compatriot talk about the S-Vacc in such glowing terms. For us, getting the S-Vacc up and running this year is a key goal. This will be a real game-changer for Singapore’s asset management industry. ©2018 funds global asia

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