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Top 400 Asset Managers: East Asia shows growth potential

East Asian markets are likely to experience high growth potential, according to Aymeric Poizot, with multi-asset and international funds most likely to attract growing flows

In the coming years, Asia’s highest growth in assets under management (AUM) is most likely to come from China, Indonesia, Malaysia and Thailand – emerging Asia – in Fitch Ratings’ view. Levels of fund investment make up 5% of total financial assets, compared with 15% in the West, according to the Economist Intelligence Unit and Boston Consulting.

The region has a large, growing middle class seeking investment opportunities, and which means the area has significant growth potential.

East Asia can broadly be divided into two groups of countries, based on the development of their asset management industry and the size of their middle class – developed Asia with Hong Kong, Singapore, Taiwan and Korea, and emerging Asia with China, Indonesia, Malaysia and Thailand. In terms of the big picture, East Asia consists of $2trn (€1.5trn) of offshore AUM, mainly distributed in Hong Kong and Singapore, $1trn of domestic fund AUM and $2.5trn (not all third-party managed) of institutional assets concentrated among a few pension and sovereign wealth funds.  

China’s recent growth is below its potential
Even though the Chinese market has great potential, the country’s fund management industry has experienced limited growth in recent years, while Indonesia, Malaysia and Thailand have exhibited double-digit annualised growth in AUM. There are several reasons for this. China has seen a focus on equity during a five-year bear market, and its fixed income market has remained under-developed until recently. The launch of wealth management products within banks and fierce competition among different players, including asset management companies, trust companies and securities companies, have also contributed to a lower growth profile for China’s asset management industry.
Stabilising equity markets and recent regulatory initiatives will probably allow the gap between China and other markets to be closed in the next few years, in Fitch’s view. We already observe the rapid development of fixed income funds in China, which now account for 40% of total fund assets under management.

Don’t ignore distribution hurdles
Distribution in East Asia can be challenging. The cross-border market is rather concentrated in the Hong Kong and Singapore wealth management segments, as well as with a small number of sophisticated institutional investors. As a result, competition between international managers is intense. In the retail market, the region is geographically fragmented and large consumer banks dominate distribution in most countries, making distribution agreements key to success.

In a number of countries, including China, Thailand and Malaysia, the authorities
require asset managers to have local fund management operations. This can represent a challenge for international managers. The majority of the top 15 domestic managers in east Asia by onshore mutual fund AUM, are local companies linked to domestic financial institutions. There are also a few joint ventures with foreign organisations.

$2trn offshore AUM in Hong Kong and Singapore
As fund investments are growing in East Asia, investors are increasingly confronted with the limited diversification available in their respective markets both in fixed income and equities. While investing overseas is a desirable option, it is not always possible given that onshore funds are biased towards domestic assets and foreign funds are not always accessible.

In Singapore, Hong Kong, Korea and Taiwan, funds of international providers can be sold directly – notably through bank branches, private banks, wealth managers or financial advisers. In Malaysia and Thailand, offshore funds can only be sold through wrap structures, while in China and Indonesia, the distribution of offshore funds is not yet permissible. As regional hubs, Hong Kong and Singapore account for $2trn of offshore funds’ AUM, largely consisting of European UCITS funds, whose number has grown to reach around 6,000 funds registered for sale in the region in 2012.

Large foreign managers offer broad cross-border fund ranges in Asia to address the needs of investors in search of geographical and asset class diversification. The focus is largely on equity and bond funds, which can serve as building bricks in a diversified allocation decided by a local adviser.

While Asian authorities have started to discuss a regional passport for funds, similar to UCITS in Europe, the most promising development in terms of regional cross-border activity resides in renminbi-denominated funds, managed from Taiwan, Singapore or Hong Kong.

Fixed income dominance
Fitch anticipates that multi-asset and internationally exposed funds will attract growing inflows in the coming years in East Asia, as they offer more diversification. Domestic funds in East Asia exhibit a bias towards core fixed income products and 2012 flows have continued to favour bond and money market funds across the region.

These funds have some perceived similarities with deposits that still represent an important proportion of households’ financial portfolios. The move towards internationally exposed funds may be less prevalent in China as the future size of its capital market, including fixed income, could offer enough diversification.
 
Aymeric Poizot is managing director, EMEA fund and asset management ratings, Fitch Ratings. The full report on the sector, Asset Management in East Asia: Growth Shifting to Onshore Markets, is available at www.fitchratings.com

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