The impact of financial technology, developments in Asian passporting and the promise of new markets in Thailand were among the topics discussed by our panel. Chaired by George Mitton in Singapore.
(business development associate, Stradegi Consulting)Armin Choksey
(partner, asset management, assurance and advisory, PwC)Caroline Higgins
(senior vice president, global fund services Asia, Northern Trust)Showbhik Kalra
(head of intermediary and product, Schroders)Jek-Aun Long
(partner, head of Singapore financial services/funds team, Simmons & Simmons JWS)Alex Zeeh
(chief executive, SEA Asset Management)
Funds Global – What is your outlook for the equity and bond markets in the region in the coming months?
Alex Zeeh, SEA Asset Management –
The US trade war with China has led to risk aversion in emerging market assets and an exodus from emerging market currencies, particularly in Asia. Generally, a strong dollar is bad for liquidity in emerging markets because people go back into US dollar-denominated assets, so that’s bad generally for Asian assets. I am not at all optimistic.
Showbhik Kalra, Schroders –
In the next few months, with global growth weakening and the trade wars taking place, I’d be cautious on Asian and emerging market assets in general. One country that stands out is India, which is less exposed to global trade and tariffs. That being said, from a medium to longer-term perspective, this weakness is creating value and we are starting to see lots of opportunities in the region.
Caroline Higgins, Northern Trust –
Although I agree with these concerns, if you look at the market infrastructure in China – the Stock Connects, MSCI inclusion, Bond Connect, ETF Connect – these developments are keeping the market buoyant. We think this infrastructure is driving new activity in these markets.
Jek-Aun Long, Simmons & Simmons –
I’m told by my friends in the asset management space that the US market is at a 52-week high while in Asia it’s at a 52-week low. That is not a common sight. I hear that the topic of trade wars is causing a lot of inefficiencies and looks to be inflationary. The general message I’m getting from my clients and acquaintances is to be cautious.
Alpha Baid, Stradegi –
The trade war, the US Federal Reserve policy, interest rates and the fact that Asia is in a bloc with other emerging markets definitely have an impact. Near term, there is caution. However, in the long term, most of us are optimistic about the Asian story.
Funds Global – Technology is playing an ever-growing role in financial services these days. Which areas of technology have the greatest potential to enhance or disrupt your business?
Armin Choksey, PwC –
Technology plays a big role in disruption. In the front office, platforms like Aladdin are disrupting the smaller, desktop-type, bespoke, specialised offerings. We are seeing some middle-office offerings too, which shows there are opportunities there. In the back office, robotics and RPA [robotic process automation] are disruptive. Client acquisition and customer experience is not there yet in Asia but that is an incoming wave expected soon. It is not here yet, because the infrastructure for such initiatives in this part of the world is still very rudimentary.
The impetus that will shift the market very quickly is regulatory intervention on fees. If there is a move to suppress retrocessions and/or front-end loads in the major markets, it will lead the market to think of moving towards low-cost products. It is through reduced friction, reduced cost of transmission, that technology will play a bigger role on the distribution side.
India has done very well with reaching out to mass scale through mobile phones and the potential hasn’t even yet been maximised. In India, the number of transactions on mobile versus the internet have reached almost 70%, according to the last stats I saw. That’s a great lead indicator – forget the internet and focus on mobile.
As a boutique asset manager, we are somewhat protected from these disruptive trends. We operate in a niche and our advantage is that large players cannot scale in a small niche like ours. I can understand how large firms are having to turn to technology to avoid bottlenecks or choking points. The bigger you get, the more you need fintech and robots to replace people.
Innovations in financial technology are a big opportunity for our industry right now. We are looking to adopt not just new technology but also more mature technologies that can make us more efficient. Here in Singapore we launched Schroders GO, the industry’s first chatbot, and we have a number of our intermediary clients now using it. Earlier this year, we also took a minority equity stake in WeInvest, a Singapore-based digital wealth services business. WeInvest is a technology platform provider for banks, wealth and asset managers, insurance companies and independent financial advisers.
As an industry, we have to improve client experience by using the mobile channels. We have to protect client data. We also need to enhance our capability around artificial intelligence and robots. Service providers are currently using these for repetitive functions such as reconciliations. Robots are pulling down information, downloading, sorting and storing it.
These functions all sound simple, but when you’re doing them on a large scale every day, you are talking about hundreds of hours of human effort, in which partners can focus on more value-added client experiences.
Blockchain is a game-changer. Northern Trust has actively led development in this area, launching the first deployment of a blockchain solution for private equity, and we continue to review opportunities around blockchain.
We see a lot of interest in regtech, or regulation technology, which helps with a lot of the compliance burden. We also see clients investing in distributed ledger technologies, blockchain, cryptocurrencies. They know it’s risky, but they think they need to be in there.
Some of our clients, the younger ones especially, want to communicate with our lawyers through WeChat or through WhatsApp rather than through the regular email channels or just picking up the phone. A lot of these adoptions of technology seem to centre around, from what I see as a lawyer, keeping the costs down. There is a lot of attention being paid to total expense ratios now.
The asset management industry has been slow to adopt technology, and rightly so because if there isn’t that pressure on cost and margins, you can afford to maintain the status quo.
But with margin pressures, moves to passives, alternatives, private equity, real estate and so on, an asset manager’s needs are changing. The legacy systems were meant to support vanilla equities and bonds, and now that managers are exploring newer products and asset classes, new technology is needed.
In terms of disruption, the one we should mention is robo-advisers. I am not sure how far the fully automated versions will go, especially because of the scale and customer stickiness needed for commercial viability, but they are a great tool in a hybrid format where they support advisers. While blockchain is a promising piece of technology, I believe its development in asset management will take time.
Funds Global – The Singapore Variable Capital Company (S-Vacc) will provide a new fund vehicle for companies that want to use Singapore as a domicile. What are your expectations?
I have a somewhat negative view because we already have Ucits Sicav funds. I am German and lived in Europe for many years before coming to Asia 11 years ago. In Europe, when the European Union came together, borders literally fell, and although there are still some regulatory barriers between the various countries, Europe is a much more open concept than Asia is. Singapore is a little bit of a latecomer to this global arena and is facing obstacles from what I would say is not an integrated Asian market.
Initially it’s not going to be a game-changer, but it does have potential. The format is good. People recognise these type of structures, like the Icav [Irish Collective Asset-management Vehicle], and because it is agnostic, you can use any strategy and any asset type within that. I agree, though, on the strong competition that it’s coming up against. Ucits is a 30-year-old, well-known brand. The Cayman Islands structure is still heavily used. While it’s always hard to track the usage and the ongoing support of Cayman, there is no shortage of Cayman funds being established, and the infrastructure for Ucits or Cayman funds is pretty strong in Singapore.
The S-Vacc is the right move, it extends the full value proposition for Singapore. One question is, what can you do with it? Can you distribute it and use it outside of Singapore? That’s a big question.
The S-Vacc has to overcome a fear of the unknown. With a relatively new structure, there is uncertainty about tax issues, distribution issues, etc. Having said that, it is much needed, especially with the projected growth in the fund industry in Southeast Asia. In terms of adoption, the local and regional players will be the initial adopters. The global asset managers may follow later, because there needs to be an incentive for them to redomicile their funds.
Lawyers see the S-Vacc as another tool or building block. If you’re doing hedge funds, it offers an alternative to the Cayman exempt company. If you are looking at the private equity or venture capital space, it can serve as the main fund or the feeder fund. Many PE funds with offshore-domiciled funds already invest through SPVs [special purpose vehicles] or investment holding companies that are structured out of jurisdictions such as Singapore.
There are many complexities with using a Singapore private limited company, given the difficulties in repatriating the proceeds without structuring your capital. I see the S-Vacc potentially replacing all of these private limited companies as the vehicle of choice.
Our firm has a fairly large local fund range, mostly in more traditional assets. We are closely looking at what’s happening with these new developments. Given that Ucits is well-established here, a lot of the managers, whether they are domestic players or international managers like us, are largely managing domestic assets in their domestic fund ranges. If the investment opportunity set in Asia was to significantly evolve, then I do feel we might see more demand for this type of vehicle.
I want to distinguish the S-Vacc, which is a legal entity formed to house investment funds, from Ucits, which is a distribution regime, and thus not comparable. The S-Vacc came about because the industry wanted it. The reason to keep it flexible and strategy-agnostic is to allow it to be versatile. Today it is strictly for investment funds but it has potential to be used for REITs [real estate investment trusts], insurance-linked products, disaster bonds, securitisation. I would say the S-Vacc is a game-changer because of the way it’s structured. The fundamentals are cherry-picked from the best features of corporate funds from other leading jurisdictions.
Why do we have today 700 registered and licensed asset managers in Singapore, plus another 80-odd exempt fund managers, which are banks and insurance companies? The value proposition of using Singapore is not just distribution but actually investment into Asia-Pacific from Singapore. Private equity houses and real estate houses can make do with corporations today, but they are finding it very clunky, and all the open-ended fund guys are going out of Singapore because they can’t handle the rigidity of the corporation.
People don’t go to Luxembourg or Ireland to only invest into Europe, they go to Luxembourg or Ireland for legal entity forms and for gathering of capital, whereas the proposition of Singapore today is the other way around. Once we have Singapore’s participation in more multilateral and bilateral distribution programmes, Singapore’s value proposition in the distribution space will pick up. That is the value proposition, that is the game-changer. Singapore wants to be in a position where an asset manager can fly in Monday and leave on Friday after meeting all the relevant service providers, and have a base-case fund structure and game plan in place. That’s the value proposition that Singapore will have after the advent of the S-Vacc.
Funds Global – Outside the main cross-border funds hubs (Singapore, Hong Kong, Taiwan, etc.), which markets in Asia offer the most opportunities for funds industry growth?
Thailand. Private banks here in Singapore are targeting that market. Pictet, for example, has got together with Kasikorn Bank on the private banking side and Julius Baer recently announced a joint venture with Siam Commercial Bank to offer products and services. Thailand has an ageing population, just like China, although a lot smaller. People aren’t really investing in funds, they all have savings plans, so the market is underpenetrated.
Thailand is a market that is maturing to being open architecture. After the advent of foreign products to be made available to sophisticated Thai investors just two years ago, only one bank has made it big. The Securities and Exchange Commission in Thailand is also making efforts in investor education, enhancing the product suites of the asset managers and inviting competition in the market. Similarly, you are seeing smaller markets like the Philippines thinking of doing the same. Indonesia is starting out but they are much slower. India is doing well domestically and soaking up local capital but exporting out is a challenge.
I engage with some local asset managers in Thailand and they are doing a lot with innovation and digital distribution. The banks and asset managers are building digital innovation hubs and there is a lot of emphasis on technology. Therefore, an important consideration is competing with the local fund managers and banks who dominate distribution in the Thai market.
Some of the global managers are reassessing their distribution strategies into Asia and we are seeing a renewed focus on the large domestic markets such as Japan, Australia and Korea. While there are many managers who are registered and have presence in these countries, there are some global managers who move in and out of Asia.
We are also seeing growth in Thailand, and a lot of that is partnering with asset managers that are affiliated with the large banks. Additionally, we are working with clients like Citi in Thailand, which are taking advantage of the recent liberalisation that allows them to directly sell offshore funds. The opportunity going forward in markets like Thailand, Malaysia and Philippines is that the exposure to global assets is low. As those markets open up, we’re looking to participate there. China is also a huge priority and opportunity for us and we are participating and building our presence in numerous different ways as that market opens up, from both an investment and distribution perspective.
It’s still going to be very much the more traditional Asian fund centres that will grow strongly – Singapore and Hong Kong, given that they have such a great head start. There is obviously a lot of interest in China. You just have to look in the last year at the number of PFM [private fund manager] licences that are being obtained by big brand names. That looks likely to be a key market.
Funds Global – How much confidence do you have that Asia will develop a viable fund passporting scheme to rival or replace Ucits?
Do we need it? Yes. Will we be able to develop a viable fund passporting scheme? I have my doubts. The ASEAN collective investment scheme (CIS) has had lacklustre response. Japan and Australia are pushing the Asia Region Funds Passport (ARFP) scheme forward, and trying to make changes to the regulations to pave the way for the scheme. However, unlike Ucits, which had the European Union at the helm pulling the scheme together, there is no such authority for ARFP. Here we are dealing with fragmented markets, markets at different levels of maturity, different currencies, different regulations, different governance. Getting buy-in from all the participating countries on a scheme that works for all will be difficult.
Tax transparency and harmonisation are the really big factors. How do you balance taxation for a passporting scheme versus taxation that you apply in-country? Australia is the fourth-biggest pension market in the world and continues to grow, so there needs to be a balance, and I don’t know how you balance that passporting with some of the countries that are part of it.
Even mutual recognition of funds (MRF) between Hong Kong and mainland China has faced some challenges. While people want to be part of it, the flows tend to favour one country over the other. Harmonisation is a key factor.
We are looking to register a few funds through the ASEAN CIS in Malaysia as we speak, and it’s a process that’s been going on for a number of quarters. It’s quite challenging to do so. There is still a lot of friction in some of these schemes.
I go back to the point that whether one looks at MRF or ASEAN CIS, what we can offer up in these passporting markets is strategies that are largely investing in local or Asian markets. It’s sort of a chicken-and-egg issue. No one is going to invest in domiciling global strategies out here if the passporting scheme doesn’t function ideally. Hence, it is going to take time for these schemes to mature.
Our focus is on investing in Asia and distributing in Europe. We have a fund in Singapore and for distribution I’ve looked briefly at Hong Kong, but our distribution market is really Europe. This has to do with our administrator, a very German/Europe-centric organisation.
I wouldn’t say I’m sceptical, but I would say I am realistic, and also hopeful. These passporting schemes in Asia are just starting up, and given how diverse the tax and the regulatory regimes are across the region it will be difficult, but there seems to be political will to start it off and to progress it. Personally, I would have thought that starting with mutual recognition schemes might be easier, and then having all that consolidate into one regime. For example, China has MRF with Hong Kong. I wish Singapore had one.
It has been a Herculean task of the last eight years to put the ARFP together, and with a strong will of the regulators, the mood is very optimistic. There were structural issues with ASEAN CIS which partially were fixed in March of this year. There has been a small uptick of up to 17 from 11. ARFP is under pilot right now, the pilot results will be announced next month.
Today, there are 20 participants in the pilot programme. Our research has identified about 320 fund managers in just today’s five participating countries that are eligible to join the passport today at the $500 million AuM [assets under management] benchmark. If the eligibility is brought down to $350 million, as in ASEAN CIS, then the number of managers eligible creeps up to 420. It is not just the incremental number but the relevance of those managers, who are local and regional managers who desperately need cheaper options of exporting in the Asia-Pacific region.
There is another development brewing. Latin American markets have introduced the Pacific Alliance passport with Mexico, Peru, Chile and Colombia as its members. The Pacific Alliance countries have expressed interest to have an interoperability MOU [memorandum of understanding] with the ARFP countries, planned for October 1, 2019. Therefore, you will have the Latin America corridor participating in the Asia-Pacific passport and vice versa. Singapore and Philippines are the closest to joining the passport. We have also noted Hong Kong and Chinese Taipei raising their hand up as “observers”. The Indian regulator is optimistic to join but the local fund managers are putting up a resistance.
Funds Global – Are there any other regulatory developments that are affecting your business? What are the main regulatory issues that are taking up your time at the moment?
For us, it’s probably fees. If you look at Singapore as an example, the local defined contribution scheme will cut the upfront commissions that can be charged to end investors, and then will eliminate them next year. It doesn’t affect us directly, but it affects our intermediaries and that will affect how products are sold. In Taiwan, we are seeing similar pressure on the way incentives are provided by asset managers to intermediaries. There’s a consultation there that might go into effect at the end of next year. In Hong Kong, intermediaries have had to go transparent to end investors with how much they make from the sale of a fund. We are probably at the early stages of fees becoming an even bigger focus of regulators in the region.
I would say this is the first time in the last ten years that we haven’t had a large amount of regulation to focus on. We are able to take a slight step back in Asia and focus on products and services.
Funds Global – When you look ahead to 2019, what are your ambitions, both for your organisation and for the market as a whole?
We have recently been granted the capital markets licence by the MAS [Monetary Authority of Singapore] to grow our business, so at the moment we are adapting to the new requirements from a regulatory perspective. We are exploring different channels on how to grow the business in terms of joint ventures or acquisitions or mergers, and exploring new distribution channels.
We have touched on a number of these ambitions over the course of this discussion, including embracing new technologies, getting more efficient, cultivating new markets, further diversifying our business and investing for the future – as the region continues to grow and evolve in interesting ways.
We want to grow our capability around alternatives servicing, which is a trend that is continuing to grow in Asia, and also around middle-office outsourcing. Legacy technology solutions are cobbled together, and now they’re just not scalable, nor future-proofed for larger investment solutions.
As we face disruption and transformation, we also need to bring all our partners on that journey. We want to stay engaged and active in the market, particularly around new types of technology such as blockchain.
There is so much regulation, commercial pressures, increasing competition, cross-border issues to navigate, and as a law firm we want to be a trusted adviser in this space for our clients to help them navigate their most complex challenges. In order to do so, we need to be bold, we need to be agile and we need to be innovative, which is very much in the spirit of the times.
Our ambitions are to be ahead of the curve so that we can help asset managers evolve with the times to structure their operating models and technology infrastructure. We have invested heavily and continue to do so in building our capabilities in robotics, data analytics and artificial intelligence.
Our ambition as a firm is now to take S-Vacc and ARFP or other bilateral programmes to market. Our prowess in the cross-border asset management market via our market research and Asian investment fund centre is available to explore anything in the asset and wealth management space in addition to audit, tax and regulatory.
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