China will shape the way asset managers do business in Asia like no other country, say the participants of our roundtable. They discuss the recently proposed fund passport between Hong Kong and China, the gradual opening of the mainland market and their visions for the rest of the continent. Edited by Stefanie Eschenbacher.
Keith Li, chief executive officer, Bosera International*
Ben Rudd, head of overseas investment, Ping An Asset Management
Jelle Vervoorn, managing director, HFT Investment Management (Hong Kong)
Pauline Wong, head of Hong Kong, global services, State Street Bank & Trust
* Since this roundtable took place, Keith Li has passed away. We print his answers at the request of Bosera International and with permission from his family
Funds Global: The recently proposed mutual fund passport between Hong Kong and China appears to be moving ahead quickly – a stark contrast to several other lingering proposals. How would a revamp of cross-border distribution in Asia affect your business?
Pauline Wong, State Street Bank & Trust: The various quota schemes that regulate cross-border flows of funds, namely the qualified domestic institutional investor (QDII) and qualified foreign institutional investor (QFII) schemes, are a challenge. Assuming such quota schemes are still in place, setting up a fund in Hong Kong and then selling it into China will not be as straightforward as one may expect. It will remain a step-by-step process, with success determined by quotas and regulation.
Jelle Vervoorn, HFT Investment Management (Hong Kong): Ultimately, the success of any cross-border fund distribution scheme involving onshore investments will depend on the access to China. Asset managers are getting excited about the passport, envisaged by the Association of Southeast Asian Nations (Asean). Under the current proposals, however, investment will still be restricted by China’s various quota schemes.
Ben Rudd, Ping An Asset Management: The thought of an Asian fund passport is certainly appealing, but the fragmentation of its markets will hamper the progress. This is particularly the case for North Asia. The Hong Kong fund structure is already well-recognised across Asia, but there is a clear preference for superior offshore structures among institutional investors and high-net-worth individuals.
Wong: On the subject of an Asian fund passport, North Asia will face greater challenges, especially with Japan and Korea having large domestic fund markets. Most people believe that a Greater China passport is more realistic; the Asean model is still subject to negotiations, because all countries have to consider their own interests. But it has a higher chance of taking off. It could be a Ucits-like structure or an unregulated one, run from the Cayman Islands. Trying to market a Hong Kong fund across Asia is going to
Keith Li, Bosera International: Ucits is still my preferred choice, although I am excited about the proposed fund passport between Hong Kong and China. We expect foreign asset managers with a manufacturing capability to approach us, asking for a co-branded product. They will ask for our name, our reputation and our distribution channels
Wong: The Hong Kong and China passport will be a key opportunity to a lot of asset managers. At State Street, we are excited about the opportunity. But for us it is not an issue because we already have such a large presence.
Vervoorn: In the absence of feasible schemes that cover the entire region, asset managers will stick with Ucits or Cayman Islands-domiciled structures for now.
Funds Global: Europe prides itself on having created a supposedly global product that can be sold into some 80 countries, but Ucits is not recognised in the world’s largest markets. How are distribution channels evolving?
Vervoorn: In Asia, perhaps more than anywhere else in the world, the platforms that serve institutional clients and retail clients differ vastly. International asset managers tend to be better positioned to serve institutional clients, who usually ask for solutions rather than certain products. Retail business tends to be more local, which is mainly a result of regulation. Regulators will gradually open some markets, but asset managers will still have to comply with the local regulations, which often means having funds locally domiciled. Regional distributors are the big targets for us, but are also faced with local regulations, when it concerns retail distribution.
Wong: Retail distribution in Asia, especially in Hong Kong, has been hard in recent years. More asset managers have been coming to the market at a time where regulation is getting tougher and investment sentiment is low. I am sure many of our peers have had an experience of spending at least an hour in a bank answering questionnaires when trying to buy an investment product. They almost made us vow that we know it is a risky investment product and we could lose all our money. While it is good for investor protection, it is also true that asset managers who try to sell a product are having a hard time.
Rudd: Retail is a local business so the idea that any foreign asset manager, be they Chinese or American, can go into a local market and establish a local retail distribution network does not work. They will have to team up with a domestic partner if they want to be successful. We do not focus on mass retail but on institutional business, which is partly driven by regulation. Regulation does become a whole lot more complicated once asset managers target retail investors. Our success does not depend on the next big product; instead, we take a gradual approach and aim to grow sustainably.
Li: The first thing Chinese asset managers learn outside China is that there are no banks that sell their products everywhere. Distribution strategies differ significantly. In China, asset managers try to get close to one of the four big banks that can distribute their products across the entire country. Outside China, there is no bank that will distribute asset managers’ funds worldwide. We try hard to get into some banks with regional distribution capabilities, but it is a tough and lengthy process.
Wong: Fund trading platforms have been successful in Singapore, but not so much in Hong Kong. Australia has been trying to push for a fee-based advisory model, which is gaining momentum. It is not expected to happen in Hong Kong, or at least not any time soon. Asset managers are constantly looking for new distribution channels.
The question of the fund domicile does not really matter to most investors. However, there may be encouragement from all regulators to launch more domestic products
in an attempt to build the local market.
Funds Global: How can asset managers build a scalable and economically viable business model in Asia, a region that is already hard to serve profitably, and getting more so?
Rudd: Scale in the home market is key for asset managers looking to expand. Asset managers that have scale domestically already will have invested in their architecture and infrastructure. They will also have built up a track record. Once they decide to expand internationally, they will have to meet different regulatory standards and adapt their operations. An international push is a risky strategy and expensive.
Li: We came from China, a market that had previously been entirely closed to foreign investors, to Hong Kong. Outside China, not many people know about us. When we arrived in Hong Kong we had no client base, no track record, no brand recognition. Despite all these disadvantages, we have the advantage of a large market share at home. In Hong Kong, everyone claims to be a China expert. Everyone. So we need to build on our China capabilities back home and find a niche.
Vervoorn: Our aim is to remain competitive in our core business and in our home markets. Instead of trying to attract more assets by developing multiple new capabilities, our focus should be on promoting our existing ones and investing in our core business. Outside our home markets, we see Chinese asset managers scrambling to find a niche within the array of China specialists.
Wong: We have seen a lot of international asset managers expanding into Asia in recent years. While some have had a presence in Hong Kong and Singapore for some time, many are starting to turn to countries like Taiwan and Malaysia. Many asset managers face problems because they neither have the scale of a global asset manager nor the specific market expertise of a local one. When expanding, they need to go out and get a new system, tailored to meet local needs, which they then have to integrate into their international model. It provides opportunities to service providers like ourselves to offer solutions.
Funds Global: How will regulation shape your business?
Vervoorn: New regulations are issued on a very regular basis, especially in China. Asset managers risk being too reactive and shaping their business in accordance with the latest regulations. The challenge for HFT is to follow its own course and strategy, while being responsive to the regulatory changes.
Wong: Regulation really does determine asset management activity in Asia. Following the announcement that there will be mutual recognition between Hong Kong and China funds through a passport, we have received a dozen inquiries from international asset managers that intend to set up local funds in Hong Kong. Everyone has heard the news that Ucits is dying; Ucits has been used successfully in many places in Asia and for a long time, but there is certainly an incentive for local governments or local regulators to develop their own cross-border fund distribution framework.
Rudd: We manage the internal insurance companies’ capital in offshore markets as well as third-party client portfolios. In autumn last year, the China Insurance and Regulatory Commission announced another step towards the liberalisation of offshore investment regulations. The very week of that announcement, I had about 50 voice messages on my phone from asset managers suggesting I should invest in markets such as Colombian small caps. In theory, those are permissible investments. Whether we can – or should – make these kind of investments is another question.
Li: Being an independent asset manager means we have to win client assets. We do not get assets by default, we gather them slowly. Therefore, we have to focus on how we build our business, rather than be aggressive in the way we distribute our products. This model is probably not appreciated in emerging markets, such as China, or even Asia more broadly, but it is with clients in developed countries.
Rudd: On the institutional side, there is definitely greater customisation. Chinese insurers, for example, are only allowed to invest in investments rated BBB, or higher. Such factors need to be taken into consideration when expanding into Taiwan, Korea or Japan. When existing products are suitable but not permissible under local regulation, we often tailor them and launch them as a segregated product. We would prefer if Asia had one regulatory framework, as is the case in Europe, but the reality is that it remains a fragmented market place.
Li: In early stages, there were worries that renminbi qualified foreign institutional investor (RQFII) quotas would pose competition for us. Investors will eventually realise that we can do a better job in terms of performance. It takes time to build investment capabilities in China and it is not enough to have a team sitting in Hong Kong, investing in China.
Funds Global: As investor demands change, how have you adapted your product range and services?
Rudd: As a Chinese insurance company, we increasingly focus on absolute returns to try and match our liabilities. During the financial crisis the relative return model looked promising, but diversification within asset classes was poor as correlations went to one between asset classes. Historically, we have not been able to use derivatives as hedging tools so the multi-asset approach appeals to us. We have seen more interest from foreign asset managers, many of whom suffered during the financial crisis because they were exposed to derivatives or other complicated structures they did not understand.
Vervoorn: Equities are back in demand in general and there is a clear interest in exchange-traded funds (ETFs), especially for the RQFII ETFs. Among institutional investors, interest in absolute return and high conviction products has picked up as well. Demand from international investors for these strategies is quite comparable with how portfolios are managed for onshore clients.
Li: Under the new leadership, the Chinese regulator has been opening the domestic market for foreign investors. The QFII programme has been in place since 2003, but the major development last year was opening up the Chinese domestic fixed income market. This has attracted the attention of many asset managers around the world, including US endowment funds and European pension funds.
Rudd: Some of the numbers speak for themselves. China is the second-largest economy in the world, but an estimated 90% of foreign capital is invested as stocks and virtually nothing in bonds – this is the opposite of most major markets.
Wong: There is a consistent and long-term need for higher yielding products, especially in a zero interest rate environment. Institutional investors tend to favour private equities in the past few years. On the retail side, there is a need for derivative products to ensure the market functions well; however, regulators tend to take a more cautious approach on product proposals that feature derivatives.
Rudd: The Chinese government’s policy of internationalising is sensible and clever. Transaction volumes are increasing and we finally see an incentive for foreign companies to settle their trades in renminbi. For example, there are reports of companies buying components manufactured in China getting a 2% to 5% discount if they pay in renminbi, as opposed to dollar. As offshore circulation increases, there is a greater need for such offshore renminbi assets to be invested.
Li: Interest in renminbi products is what keeps asset managers like us in business. We receive a lot of enquiries from various parts of the world, but we are still in an educational stage.
Vervoorn: Aside from investors in the region, the most recent interest has come from European and Middle Eastern clients, who know more about China and are more open towards investing there.
Rudd: Corporate bond issuance is creating a new asset class with different return profiles. The bond market has certainly seen a revival as Chinese companies are trying to disintegrate from the banking sector – as one would expect in any country moving towards middle income status. Companies in China want more direct access and better pricing to capital.
Funds Global: Only 11% of the working population in Southeast Asia and 37% in East Asia are covered by pension plans compared with an Organisation for Economic Co-operation and Development average of 70%. Will this lead to more pension funds being created? How can managers capture that potential?
Vervoorn: One of the questions asset managers ask themselves is whether they can source the investment instruments that are suitable for long-term portfolios. Can they find the investments to match the liabilities? Can their investments deliver the income their pension schemes demand? There is huge potential that asset managers, together with pension funds and insurance companies, can exploit.
Rudd: The provision of some kind of a pension has always been a government responsibility. Hong Kong has launched the mandatory provident fund while Singapore has managed to dodge a huge liability with the central provident fund. Asian governments are, rightfully, recognising that government pensions are a huge future liability. They will increasingly try to privatise the pension business, although it is unclear how and when this will happen in different countries.
Li: Pensions in China are not even under-managed, they are not managed at all. Trillions of renminbi are lying in bank accounts earning little or no interest. There is a huge potential for asset managers. It is unlikely, though, that the Chinese government will let foreign managers touch local pensions. Asset managers will have to be based in China or work through a joint venture.
Rudd: Asia will become a significant market for asset managers because billions of people will need a pension and only private sector participation can fill this gap left by the government. Once countries reach middle income levels, the desire for products that provide more than a government pension increases significantly.
Funds Global: Private wealth managers have started launching their own products, sometimes in conjunction with asset managers. What strategies are you looking at to compete with some of these products?
Rudd: Asset management and wealth management is a completely separate business; wealth management is much more about service provision. Asset managers would have to run two separate businesses if they would like to take on wealth managers.
Li: Wealth management in China is about being innovative on the product side, not on the investment side. Their business centres on closure, special redemptions and other features, rather than the technicalities of investment. There are, however, opportunities because wealth managers can outsource the manufacturing of products.
Vervoorn: Asset managers can develop wealth management products. Providing wealth management services is a totally different business. There is a clear line that we would not cross. Instead of competing, wealth managers and asset managers can work closely together. For example, on investments in China. Wealth managers are starting to receive their own quotas of between $100 million and $200 million, which is not sizable enough to run an economically viable portfolio in-house. Asset managers have a larger scale and can extend their services in the form of investment advisory to wealth managers.
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