Look East: is Asia the future of the fund management industry?

The fund management industry is in a state of flux facing both major internal and external challenges. The industry has become much more competitive. Institutional investors are more sophisticated and highly critical: they will no longer tolerate average performance from fund managers. That has caused a Darwinian shake-out of the industry with only the fittest surviving.

“There is so much wealth concentrated in a small number of funds.”

Erich Gerth

The external threats are equally tough: the European sovereign debt crisis rumbles on, stifling economic growth and reducing available savings pools. While most are more upbeat about the longer-term outlook for the US economy, things will undoubtedly remain volatile over the medium-term.

In contrast to developed market doom and gloom however, the prospects in Asia are a bright spot on the horizon. The Asian growth story is well-known: rapidly growing economies are creating an emergent and increasing affluent middle class with a purchasing power to rival those in the developed world. According to Aviva Investors, the region’s share of global GDP is forecast to grow to 38% by 2016 from 30% in 2006.

But the growth prospects in Asia are not only confined to investment opportunities for fund managers: a strong savings culture and healthy economic growth translates into a long-term opportunity for the fund management industry.

The US still has the largest share of global assets under management with Europe a sizeable but distant second. But both markets are highly saturated and very competitive. There is, however, considerable growth potential in the developing markets, providing local regulatory, legal and cultural barriers are successfully navigated.

Baber Din, M&A director at Deloitte, says: “GDP in BRIC territories is currently worth around $13trn and is forecast to expand to $95trn by 2050. This tells a story of increasing affluence, rising middle classes and greater financial sophistication – and therefore a growing market for investment and savings products.”

Asia is an enormous region, encompassing 48 different countries with a population of four billion people speaking hundreds of different languages. It also spans a wide range of financial sophistication: at one end of the scale is Hong Kong and Australia with highly developed first-world retirement savings models. At the other end is China and India where there is significant unmet need for a robust long-term savings plan but the infrastructure is entirely undeveloped.

Erich Gerth, chief executive for Asia Pacific and global business development at Aviva Investors says: “A mistake often made by companies moving into the Asian market for the first time is to view it is a homogenous market. It isn’t. Different products and distribution strategies need to be developed for each individual market.”

It is, however, all too easy to get carried away by the optimistic picture that the data paints of the region. While the broad-brush macroeconomic outlook is indubitably optimistic, the real challenge is how to translate such trends into real profits. The reality is that is much harder for the fund management industry to do business in Asia than it is in the developed world. There are a number of major obstacles standing in the way: a lack of infrastructure in many markets, a restriction on foreign ownership of businesses and a ban on investing overseas.

For fund managers focused on institutional rather than retail business, the challenge is at first glance much less daunting. There are relatively few large pools of capital in Asia, controlled either by central banks or sovereign wealth funds and these are run by the world’s best and brightest finance professionals. These funds run eye-wateringly large sums of money, adding up to many hundreds of billions of dollars. It is a fairly simple exercise to compile a list of the 50-60 major institutions worth approaching.

Gerth says: “The allure for asset managers is there is so much wealth concentrated in a small number of funds that it takes only a small amount of additional spending on distribution to make a pretty significant return on investment.”

But just as bees circle a honey-pot, so do fund managers swarm towards such a rich vein of institutional funds. While it maybe a relatively simple exercise for fund managers to find the Asian institutional funds, it’s not so easy to convert that into new business.