New research from State Street Corporation reveals that the top priority for fund managers is expansion into new markets in Asia Pacific. However, the survey finds that the industry is grappling with the region's highly fragmented markets. The report, entitled "Navigating For Growth," reveals that fragmented markets are creating complexity for regulatory compliance, product innovation and efficient scaling of operations.
State Street, in partnership with Longitude Research, surveyed 200 asset management industry executives across the Asia Pacific region to explore the key issues in the fund management industry's evolution. The majority of participants were senior executives based in Singapore, Hong Kong, Japan, Australia and China. In terms of activities, 46% worked for domestic asset management companies based in the region, 36% for major international businesses headquartered in the region and 19% for international businesses from outside the region.
Expansion into new markets was on the list for 42% of respondents, while 28% put this top of their list of actions. The report says that faced with low returns and a limited market size at home, asset managers are looking to developing economies and high savings rates in other Asian markets for growth. Deepening penetration of existing markets was the top priority for 24% respondents.
Japan saw asset managers as most keen to expand into new markets with more than half at 52% making this a priority. New market expansion was a priority for 28%in Hong Kong, 23% in China and 23% in Australia.
Paul Khoury, Head of Asset Manager Sector Solutions in Asia Pacific for State Street Global Services, said that the growing Chinese market is one of a number of priorities for asset managers in the region. "Many companies in the survey that wish to operate in China are already doing so. Now asset managers are also looking to frontier markets with 54% of those preparing to enter a new market considering Malaysia, while 43% are considering expansion in Thailand."
The survey found that despite ambitious growth plans across much of the industry, the region's fragmentation posed a substantial barrier - cited by 51% of total respondents as a serious or very serious challenge for their business. Among firms that operate in more than one country, the figure rose to 63%.
"The region is more fragmented than any other in the world in terms of size, geography, language, culture, regulation and tax harmonization," said Damien Barry, Senior Vice President, Offshore Funds Services at State Street.
Regulation was a significant concern with 52% of respondents saying they need to make significant changes to systems and processes to meet the diverse reporting requirements of multiple jurisdictions. State Street found it even more striking that 38% of managers are concerned about their firm's ability to assure compliance with fragmented and evolving regulation in these different jurisdictions. A majority at 51% said they needed to make substantial changes to develop strong risk management strategies tailored to each market.
The survey comments that although several pan-regional initiatives are underway to improve regulatory integration, such as the Asian funds passporting initiative, the mutual recognition among ASEAN countries and between Hong Kong and China, the extent to which these will materialise as sustainable, scalable, efficient product opportunities, and the form they will take remains unclear. Where successful, these schemes could be hugely effective and present significant opportunities for asset management.
"With these pressures, and despite the hunger for growth, it is not surprising that 69% of respondents described scaling operations efficiently as a serious or very serious challenge in the region," said Khoury. A further 71% of survey respondents thought that optimizing returns in a challenging global environment was a serious challenge.
The survey found that technology is key for asset managers to gain a consolidated picture of exposures globally as portfolios become increasingly complex. The report says: "A growing interest in alternative investments to help drive returns and manage risk means that firms will need data platforms with multi-asset capabilities.
When asked in what areas they need to make most significant changes in relation to maximising value, 57% cited integrating and consolidating investment data from disparate sources, 49% cited preserving margins in face of downward fee pressure, and 39% cited managing complexities associated with investing in alternative asset classes."
"Product innovation is a major challenge for asset managers in this region," said Barry. "Critical success factors include having the right technology, a deep insight into local investor demand, and a clear view of regulatory impacts on new product development. Asset managers need to consider which products will drive value over the long term. While a focus on on-trend products is understandable, and may be an effective way of attracting assets in the short term, it may not necessarily be in the best long-term interests of investors. Ultimately, managers need to find a way to create long-term value within the parameters of what will sell."
Khoury concluded, "Asia is as the heart of the economic transformation that is reshaping the world economy. The asset management industry has a huge opportunity to take advantage of this shift by pursuing growth opportunities created by the increasing investment in Asia and the region's growing supply of domestic capital. However, the challenges will define the winners. Companies need to focus on generating long-term value for investors and thoroughly understand the markets that they are targeting. They need to chart a new roadmap to take them to the next stage of growth."
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.