RBC Investor & Treasury Services
Amid much complexity, Andrew Gordon, Managing director for Asia at RBC Investor & Treasury Services outlines what he thinks will dominate the agenda at FundForum Asia 2017
What do you expect from this year’s FundForum Asia?
FundForum is the biggest asset management-focused event in Asia each year, with a healthy combination of the global managers, many of whom are already very active already in Asia, and some who would like to be more active in Asia, as well as local players and service providers that support the industry. It’s an opportunity for everyone to take the temperature of where the industry is, and consider where they’re going.
Despite a few clouds on the horizon, the macroeconomic climate in the region remains strong. There is continued strong economic growth in China and a number of other markets, and we are seeing themes of an emerging middle class that has disposable income and the ability to buy investment products. Different markets in the region have different demographics.
Some have young populations with long-term savings needs, while others are already facing old-age crises. Those factors make for a dynamic environment for asset managers.
Beyond that, there are some interesting specifics around China—a market that offers unique challenges. Here, there is clearly growth in the asset management industry, but I would caution that it is not easily addressable, particularly for foreign players.
Will China be a big talking point on the conference agenda?
China is always a big talking point, with numerous themes emerging. We are seeing the rapid emergence of technology-driven distribution, particularly for money market funds (MMFs), that are distributed effectively over the Alipay platform. This is not a particularly sophisticated investment product, but it is a very innovative distribution technique that has raised a large amount of assets, more than doubling the size of the Chinese mutual fund industry over a relatively short amount of time.
A number of our clients are distributing their UCITS funds into China, primarily through the private banks. It’s not a high-volume business because of the qualified foreign institutional investor quota, but there is modest activity coming out of it. Asset managers are also able to run joint ventures—some successfully, some less so—and this has enabled foreign firms to gain direct experience of the Chinese market, in terms of producing new products and selling those products through secondary distribution channels.
We are also starting to see activity around the wholly foreign-owned enterprise (WFOE) in China. It’s only recently that overseas asset managers have been allowed to own a WFOE and to manage domestic assets on behalf of domestic clients—previously, they were limited to minority interests in a joint venture. That’s quite a significant opening up of the market that has allowed, and encouraged, global managers to expand their footprint.
Asset managers have also been using the stock connect programme, which now covers the Shanghai and Shenzhen exchanges, and many are looking to test the inter-bank bond market.
On top of this, a bond connect programme is expected to be opened up by the end of the year.
There is a lot happening around China, and it will be interesting to see whether asset managers will take investment exposure there or gather investor capital. Everyone needs a deliberate strategy, and, given the characteristics of the market, I think it’s important to take a pro-active decision in how to approach it.
How does the Mutual Recognition of Funds scheme between China and Hong Kong compare to other fund passporting schemes?
Each of these schemes is moving at a different pace, and each has its own portfolio of markets that it covers. The Hong Kong-China Mutual Recognition of Funds (MRF) scheme has been fully active for over a year, but there is a fairly small number of funds that have been approved for northbound distribution so far. There are funds that have met all of the conditions, and appear to be waiting on foreign exchange approval from the Chinese authorities. This may be a macro situation, in which China is managing its foreign exchange reserve position and the value of its currency. That may be what is driving whether the tap is on or off, and currently it is off.
The impact of a disappointing first year means asset managers are increasingly viewing mutual recognition as something they would like to do, but not necessarily in the short term.
The other significant fund regime, the Asia Region Funds Passport, is not up and running yet, but is believed to be on track. With the breadth of markets it covers, including Japan, some market commentators believe this will be the winner over time, but it’s too early to tell at the moment. Where there does seem to be a consensus, however, is that the Association of Southeast Asian Nations collective investment scheme is so far failing to deliver expected volumes.
A very small number of funds have been approved and an even smaller value of assets have been raised by them.
How will the introduction of these schemes affect UCITS distribution?
Cross-border fund distribution in Asia today is still dominated by UCITS. They’re heavily sold in markets such as Hong Kong, Singapore and Taiwan, and in other markets to a lesser extent, either directly or through feeder funds.
Having many local funds can pose a risk of fragmentation. If you’re going to set up funds in multiple markets, run different structures with different rules, and work with different service providers, you’re going to inject more operational risk into your business—much more than you would have if you were distributing a UCITS fund with a greater volume of assets and more consistency around operating parameters. A UCITS provides one big fund rather than a portfolio of smaller funds with similar, but different, rules.
Everyone in financial services is concerned with the proper management of risk, and Asia is particularly challenging because in order to get outperforming strategies into the hands of a wide variety of investors you have to deal with various different jurisdictions and practices. It has to be worth it, and you have to have the appetite—and the resources—to do it properly. UCITS funds still offer a relatively easy way of managing this, but there are questions in the market as to whether they will continue to have such a large share of cross-border distribution in Asia. That’s where the fund passports come in.
What other major challenges do you see on the horizon in Asia?
There are always going to be regulatory questions that need to be answered. In Hong Kong, the regulators are starting work on something similar to the UK’s Retail Distribution Review. It looks as though Hong Kong will go down the transparency of fees route, rather than prohibition on the payment permission for fund sales. That type of change in the environment could be huge if it doesn’t go in the direction the industry anticipates. Nobody underestimates the ability of regulation to reorder priorities. Each market is very different, and the fact that Asia is so many markets means managers have to make conscious decisions about where they want to do business and in what way.
The second point has to be technology. There are a lot of technology disruptors and not only in the financial technology space. There are robo-advisers setting up in Hong Kong, Singapore and China and there are traditional service providers embracing robo-type technology. So far, none of them have made any real impact, but in three to five years, it would be sensible to assume that they will have, let alone looking ahead 10 years or so.
We’re also seeing pure online distribution of funds, and there is a government-sponsored online funds supermarket in South Korea already. It has not done well so far, and the main reason appears to be confusion—there is too much choice and not enough advice to help investors. In many ways, I would see this as a positive for the industry, but there are also online providers in Hong Kong offering business-to-customer and business-to-business models of the same kind of platform, so I don’t see this trend fading.
We will also hear more about China. China has changed so much in the last couple of years, so in a two- to three-year, or longer-term horizon, further change is difficult to predict. Asset managers need to spend time getting their strategies right and be flexible to how the liberalisation of Chinese markets may evolve in the future.
Finally, fund penetration is low in Asia, and it is a long-standing challenge for the industry to increase it and make sure funds are used in an appropriate way, as long-term savings and investment tools rather than as short-term trades. However, five, 10 or even 20 years ago, I would have said exactly the same thing. Despite a bigger industry and favourable macro and demographic themes, this is still one issue the industry is grappling with.
