Mon, Mar 30, 2015
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Cerulli: Asian institutional assets face profitability squeeze

Thursday, November 29, 2012
Opaleque Industry Update - Niche strategy managers will prosper while general strategy managers will mostly struggle in future.

Cerulli Associates estimates that Asia ex-Japan institutional assets accessible to external asset managers (i.e., addressable assets) have expanded from US$462.2 billion in 2007 to US$998.3 billion at the end of 2011. Cerulli projects that this figure will continue to climb to more than US$1.7 trillion in 2016. At the same time, addressability will improve from 8.9% in 2007 to a projected 12.3% in 2016.

However, the growing pool of addressable assets translates into neither easier access for all types of asset managers nor greater profitability.

Cerulli's conversations with institutional asset owners show that, over the long term, the mandate universe is developing hourglass characteristics: either very specialized (such as absolute return Taiwanese equities) or very index-driven (such as minimum-volatility global equity index). Both examples are mandates from Taiwan's new Labor Pension Fund in 2012. Indeed, alternatives, single-country, and regional allocations are playing larger and larger roles in Asian institutions' portfolios.

Cerulli's proprietary survey of asset managers in Asia ex-Japan also shows that specialization has gained significance as a criterion for being awarded a mandate: in 2009, it was rated 3 on a scale of 1 to 5 where 5 is most important. This rating has increased in consecutive years to 3.5 in 2012.

Mandates that call for specialized investment abilities, such as emerging market fixed income, Greater China, private equity, or hedge funds, still pay a premium over broad mandates. For instance, institutions award 40 to 80 basis points (bps) for emerging market equities versus 5 bps to 20 bps for local fixed income. As for hedge funds, few investors have been willing to pay the 200 bps management fee plus 2,000 bps performance levy (known as "2 and 20") since the Bernard Madoff scandal; but among private equity funds, the 2 and 20 fee structure meets with much less resistance.

However, instances of fee wars-sometimes down to zero management fees-are appearing increasingly often as external asset managers in markets such as China, Korea, and Thailand attempt to win institutional assets, even if it is at a loss. Sometimes, the institutions themselves or their regulators are encouraging zero management fee structures. In China, for example, Cerulli is aware of the insurance regulator encouraging insurers to consider paying only performance fees to external managers.

"The well-established global asset management firms don't usually participate in these kinds of competition, but there is no shortage of firms that will, especially recent entrants that need the prestige and perceived credibility of managing institutional assets," says Ken Yap, head of Asia-Pacific research at Cerulli Associates. In China, for example, numerous managers of enterprise annuity (corporate pension) assets have been accepting deals at a loss for years.

On the other hand, the largest, most transparent Asian institutions, such as Korea Investment Corporation, the National Pension Service of Korea, and the Employees Provident Fund of Malaysia, are generally willing to pay fair rates for impeccable investment management and servicing, but the assets they outsource to external managers are increasingly niche.

"But the move toward increasingly niche mandates will develop over some time. For now, there are still broad mandates available, and the profitability depends on volume," Yap says. Cerulli's survey of asset managers shows that managing assets from central banks, quasi-government organizations, and pension funds (both government and corporate) yields the greatest profits in institutional business. Family offices are the least profitable, although many asset managers in Asia are keen to work with family offices.

Press release

These findings and more are from Quantitative Update: Institutional Asset Management in Asia 2012.

CLICK HERE to request a press copy of this research.

Bg

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Other Voices: Does the hedge fund industry benefit society?[more]

    This article was authored by Don Steinbrugge, Chairman of Agecroft Partners, a US-based global consulting and third party marketing firm for hedge funds. It is no secret that the hedge fund industry is viewed negatively by a la

  2. Private credit comes into focus for investors[more]

    Bailey McCann, Opalesque New York: As investors look for a way out of the low yield/no yield environment, private credit is becoming an increasingly attractive asset class, according to a white paper from Bayshore Capital Advisors. Private credit has grown steadily since the financial crisis as

  3. Other Voices: The role of diversification in CTA portfolios[more]

    2014 brought a resurgence of managed futures strategies, or CTAs, which performed very well as a whole, outperforming all other hedge fund strategies. However, a closer look reveals that there was a wide range of performance, or return dispersion, across managers. The bottom line? Not all CTAs

  4. Neuberger Berman unit buys 20% stake in activist hedge fund Jana Partners for $2bn[more]

    Komfie Manalo, Opalesque Asia: Neuberger Berman’s unit Dyal Capital Partners bought a 20% stake in activist hedge fund firm Jana Partners worth $2bn, WSJ.com reports. The deal comes as activi

  5. Hedge fund launches fall again, $1bn funds found to outperform even smaller hedge funds[more]

    Komfie Manalo, Opalesque Asia: The number of new hedge fund launches fell again in 2014, the third consecutive year of decline, while fund liquidations saw their first drop since 2010, according to the latest HFR Market Microstructure Industry Report released by industry data provider HFR. Acc

 

banner