Singapore has signed a mutual fund recognition agreement with Malaysia and Thailand, potentially also drawing in Indonesia, Laos and the Philippines. The participants of our roundtable in Singapore say competition with international jurisdictions like Hong Kong, Ireland and Luxembourg is intensifying, amid changes in local and global regulation. Edited by Stefanie Eschenbacher.
Nick Hadow, director of business development, Aberdeen Asset Management Asia, and chairman of the Investment Management Association Singapore
Andrew Hendry, managing director, Asia, M&G Investments
Praveen Jagwani, chief executive officer, UTI International
Margaret Harwood-Jones, managing director and global head of investors and intermediaries, Standard Chartered
Funds Global Asia: How do you see Singapore competing as Hong Kong steps up its efforts to become a local fund distribution and manufacturing hub through a mutual fund recognition agreement with China?
Nick Hadow, Aberdeen Asset Management: A mutual fund recognition scheme between Singapore, Malaysia and Thailand is expected to launch mid-next year. It is encouraging to see regulators can deliver a multi-lateral agreement, not just a bi-lateral one. Representatives from Indonesia, Laos and the Philippines have expressed interest in joining. There is another, separate initiative involving Australia, Korea and New Zealand and Singapore. Luxembourg and Ireland are certainly coming under pressure as a number of mutual fund recognition schemes are taking off in Asia.
Margaret Harwood-Jones, Standard Chartered: It has taken Europe many years to develop Ucits. Asia has observed and learnt from those experiences. Asia is more fragmented and diverse, meaning the European way cannot always work. It has become clear that there are different, smarter ways to go forward in developing the funds business in Asia.
Funds Global Asia: Hong Kong’s capital market is considered more innovative, more liquid and more robust. How do you see Singapore developing its capital market?
Hadow: Is Hong Kong really considered more innovative, more liquid and more robust? There are certainly people here who would disagree, even argue the opposite. Hong Kong and Singapore simply have different purposes. While Hong Kong has critical mass when it comes to the size of its capital market, it still depends on China. Singapore knows its limitations, but the growth in the private banking industry shows it knows how to position itself. There is no threat to Singapore’s position as a regional hub. Singapore can look eastwards to China and westwards to India.
Funds Global Asia: Total assets managed by Singapore-based asset managers recently took a slight dip, but have seen double-digit growth rates every year for the past three years. How have investor preferences changed?
Praveen Jagwani, UTI International: There is a degree of ambiguity as to whether those are Singapore assets or not. Since the onset of the financial crisis in 2007, money has been flowing in and out of equities, and fixed income, as people desired greater stability and yield, then high yield. In 2007, we could not even talk about global emerging market products because it was too plain vanilla. Investors wanted to venture into frontier markets – Morocco, Algeria and stock exchanges with 14 line items. Today, the bulk of assets are held in plain vanilla funds.
Andrew Hendry, M&G Investments: Investors tend to be drawn to the new and shiny. Last year, there was a successful new fund launch by Fullerton Fund Management. A typical Singaporean fund, it drew in hundreds of millions during the exclusive offering period alone. Though some of the best-selling funds in the Asia Pacific region are from prominent asset managers in Europe and the US.
Harwood-Jones: Even though the number of fund launches has been unusually high this year, money is flowing into just a select few. That said, we still see client appetite for new local funds. The desire to launch Malaysian funds, Indonesian funds or domestic funds in Singapore is there. Accordingly, one of the things we have done recently in response to this client demand is to broaden our service range in those three geographies, allowing us to fully support local customer requirements.
Jagwani: Singapore’s private banks are attracting money from China and Indonesia, but a large amount is also coming from Switzerland following the recent regulatory changes in Europe and the US.
Funds Global Asia: Pricing pressures and the need for investment to stay competitive and comply with new regulation suggest that the largest asset managers will have a scale advantage. Where do you see niche players operating?
Jagwani: It is definitely hard for niche players at the moment. The chief investment officers of large pension funds have turned cautious. They do not want to be featured on the front page of a newspaper because they made a wrong call and allocated money to a niche player. Nobody has ever lost their job because they allocated to Fidelity Worldwide Investments, M&G Investments or Pimco. If they allocate to a single country boutique manager, however, they will face questions. This is one reason why so many boutique managers in Singapore are now closing down. However, we had a Scandinavian pension fund manager in our offices in Mumbai doing due diligence. This means the tide might be about to turn.
Hendry: There is a place in the market for boutiques as well as the larger players. Boutiques are attractive. For example there are smaller scale carve-outs that specialise in fixed income asset management and alternative products. When they first started out, without the backing of a large bank or other asset manager, they were tiny. Today, their investor base has expanded to include large Scandinavian pension funds and banks, for example.
Harwood-Jones: Boutiques can deliver flexibility and an element of customisation that the larger asset managers generally cannot. They are newer and younger, and often demononstrate more innovative ideas. Moreover, when setting up their businesses just a few years ago, they did not have to deal with outdated technology, bureaucracy and other legacy issues. They tend to operate with cleaner and leaner business models, allowing clear focus on what they are good at: managing money.
Hendry: Boutiques also do not need 100 clients in every jurisdiction. They can concentrate on a handful of large investors, and that is all they need. One important endowment fund as its principal investor could be all a boutique needs in one jurisdiction. Boutiques should be appealing to sophisticated institutional investors. Although I can see why they would struggle with a retail strategy.
Jagwani: All an asset manager needs in the beginning is one or two anchor investors that believe in the strategy. Single country strategies are challenging anyway, and the further we go into frontier markets territory, the more challenging it becomes.
Funds Global Asia: Where are the limits of growth?
Hadow: We are a large Asian asset manager that manages concentrated portfolios, which is not something that can be changed easily. Expansion is limited in the sense that we cannot buy more of what we own. Unless active asset managers go passive, the room for expansion is limited. Banks, particularly European banks, are being squeezed by capital requirements to sell their asset management businesses. There is definitely consolidation in the industry, and we have been part of that consolidation process in the last few years.
Hendry: There is a lot of money chasing not enough investments. That is one reason investors are moving into alternative asset classes, such as real estate debt and leveraged loans.
Hadow: Several asset managers have had capacity issues and needed to stem fund flows. What we have done is impose a 2% initial charge on one of our funds for new investments. That has not completely stopped inflows, but it has helped to moderate them.
Funds Global Asia: Although the Monetary Authority of Singapore’s recent consultation does not propose a complete ban on commission, it does include other measures, such as a cap on commissions. How will this affect your distribution strategy?
Jagwani: The Indian asset management industry was decimated after regulation in August 2009 disallowed front load charges. The distribution machinery came to a standstill almost overnight. The inflows into the mutual fund industry have still not recovered four years on. In order to grow, the industry saw many asset managers compensating distributors, from the management fees. As a consequence, profitability of asset managers in India is under severe pressure. Of the 44 asset managers, only the top eight are profitable and between them have 65% of the industry assets.
Hendry: In recent years, there have been different proposals. The actions of regulators have had a significant impact on the advisory communities in other countries such as the UK, the Netherlands and Switzerland. In Singapore, the proposal is simply that asset managers are not allowed to pay cash inducements on product-specific initiatives.
Hadow: We have seen vigorous opposition from both insurance groups and financial advisors with substantial sales forces, who put up a strong and robust defence to regulators and politicians. Pressure was intense. Regulators have backtracked to some degree, though.
Funds Global Asia: What is your stance on the Monetary Authority of Singapore’s proposals regarding independent financial adviser qualifications, compliance and minimum financial requirements?
Hadow: We accept that we need the most professional participants in the marketplace to get the highest standards. I sat an industry exam, which focused on derivatives, even though we restrict ourselves to the use of straightforward foreign exchange forwards in our locally authorised bond funds. It is like saying, “We know smoking is dangerous, but you need to smoke 20 cigarettes a day to understand how dangerous it is.”
Harwood-Jones: Singapore aims to show that there is rigour and the discipline in place to encourage the highest standard in continuous training and development. This is something we would expect from a leading, international fund centre.
Funds Global Asia: How will you respond to regulatory changes?
Hadow: While I accept the reality that our industry is well paid, talent remains expensive. The EU moves to cap remuneration and bonuses in particular is a case of turkeys voting for Christmas. Someone else, probably Asia,will benefit.
Jagwani: The Foreign Account Tax Compliance Act (Fatca) is probably the single most difficult act of regulation for the asset management industry. We offer a Guernsey-domiciled Indian equity fund and because of six American investors, our compliance cost has gone up significantly. In order not to penalise the remaining investors, we have unfortunately had to decide to exit the American investors.
Harwood-Jones: We spend a lot of time engaging with local regulators, trying to influence the regulatory agenda for the benefit of our clients and the broader economy. Regulation is not a single global phenomenia; its consequences are local. There is no place in the world where businesses can hide from the impact of any foreign regulation. Effort is needed here in Asia for Fatca and the Alternative Investment Fund Managers Directive, for example. Even when it is only half a dozen investors buried somewhere in a particular fund, they have to be fully identified and properly treated in order to comply with Fatca. The obligation to report, to comply with the plethora of new regulation is important yet onerous indeed.
Hadow: One of the unintended consequences of the designation of tax crimes as potential money laundering offences is that now we are expected to assess the tax risk of our investors. Even if we say that we cannot be responsible for their tax affairs, we need to know that their source of funds is not the proceeds of tax crimes. How can we know this for sure? We are not tax experts.
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