Emerging trends in Asia PacificSeven challenges impacting asset management in Asia
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Drawing on our conversations with clients and industry professionals, we aim to highlight the challenges facing firms in the short to medium term.
Although the Asia Pacific region boasts many fundamentally attractive markets for asset managers, the industry is not immune from global asset management challenges common in other parts of the world. Depending on the territory, these can include growing levels of competition, revenue pressures, regulatory uncertainty and investor skepticism.
In our third report on issues facing asset managers in the Asia Pacific region, we give industry leaders an overview of the top challenges they may soon be forced to confront – if they haven't already.
- Firms across the region are facing a range of local regulatory developments. For example, Australia is home to a host of industry concerns such as the federal tax system and the ability to compete in the Asia Pacific region and beyond.
The country is not alone. Following similar regulatory action in Singapore, Hong Kong will face new rules in June 2011 requiring investment funds sold and marketed to retail investors to produce a new key facts statement.
These new regulatory moves are in response to the mis-selling securities scandal of 2008, which affected investors in Hong King, Singapore, Indonesia and Taiwan.
- International regulatory initiatives are adding uncertainty and cost inflation. Whatever the source – US FATCA rules, Dodd-Frank or the UK Bribery Act – regulatory changes create uncertainty. The impact of market uncertainty may be hard to measure, but the costs of new regulations are easy to quantify.
These costs begin with the direct requirements of compliance and also include necessary investments to attract and retain skilled employees, technology, compliance, and more – all of which are pushing up asset managers' expenses.
- Investors are becoming more demanding, and some firms are struggling to expand their revenues. Asset managers in Asia Pacific not only face pressure on costs, but in some cases on revenues. As markets stabilize and fund inflows accelerate, retail and institutional investors are increasingly skeptical, demanding transparency and value for their money.
As in other regions around the world, asset managers in Asia Pacific are experiencing a stronger investor focus on the link between management fees and actual investment returns. Additional revenue pressures include asset allocation trends, heightened competition, and higher standards of risk management and governance.
- Asset management firms are developing new products and generating investor interest through enhanced marketing and communications. In a push to reinvigorate fund inflows, asset managers in Asia Pacific are refreshing their product ranges. At the same time, the region's wealth and the interest in alternative products is growing.
Passive products that provide equity exposure at a relatively low cost are increasingly popular. Exchange-traded funds (ETFs) are particularly in demand. At the other end of the risk scale, products incorporating some element of guarantee are also increasingly popular.
Beyond product innovation, asset management firms in the region are looking to stimulate demand through better marketing and communication since even firms with strong brands need to tell a good story.
- Despite increased outsourcing, many asset servicers are struggling to turn a profit. As firms in the Asia Pacific region struggle to balance the costs of regulation, risk management and product development with the need to generate value for their owners, outsourcing is returning to the top of the industry's agenda.
This is not always good news for asset servicers since the levels of assets under administration are likely much lower than they were three years ago. Additionally, the practice of discounting fees and investing in significant systems upgrades are raising costs and putting the squeeze on profits.
The resulting pressure on profitability means that, in many markets, only the largest asset servicers are creating value for shareholders.
- Some firms are trying to overcome established distribution patterns, often looking overseas. In the search for growth, asset managers in Asia Pacific are trying to develop new patterns of retail distribution. In both Hong Kong and Australia, a handful of large banks dominate the market, posing a particular problem for independent asset managers' ability to grow
Even though they do not face the same distribution challenges, many of the larger traditional firms in Singapore are also looking to develop their distribution networks in the region. As a result, there is a growing industry discussion about the feasibility of achieving rapid expansion in overseas markets.
- While there is no standard approach to foreign expansion, high-growth markets remain popular options. Growth potential is the crucial consideration in pursuing overseas expansion. Vietnam and Indonesia are particularly attractive markets that combine strong growth potential with a large population.
Yet, mainland China remains the greatest prize. As a result, many asset management firms in the Asia Pacific region without a point of access to the Chinese market are urgently looking to develop one.
One way they are doing this is by partnering with local firms. Other firms are looking to cooperate with local partners on a product-by-product basis.
- Mike Buxton
Partner, Hong Kong
Ernst & Young Group Ltd
Direct: +852 2849 9288
- Graeme McKenzie
Ernst & Young
Direct: +61 2 9248 4689
- Mark O'Sullivan
Ernst & Young
Direct: +61 2 8295 6044
- Brian Thung
Ernst & Young LLP
Direct: +65 6309 6227
- Leigh Pennington
Global Implementation Director
Direct: +27 31 576 8266