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fc41 28/5/10 17:08 Page 1

funds global
Asia Report 2010
Asia’s fund brands Special focus: Hong Kong
How long until they’re global? Mutual funds: Appetite for risk
Pensions: $15bn coming your way
Asset servicing Real estate: Locked out
Panel discussion

EXECUTIVE PANEL • INDIA’S KOTAK • NEWS

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01 EditorialASPTSnf:Layout 1 28/5/10 17:09 Page 1

funds global
EDITOR
Nick Fitzpatrick
Tel: +44 (0)203 178 5875
nick.fitzpatrick@funds-europe.com
Global brands made in Asia
DEPUTY EDITOR
Angele Spiteri Paris The number of foreign financial services firms that set up
Tel: +44 (0)203 178 5876
or expanded in Hong Kong last year aided by InvestHK,
angele.spiteriparis@funds-europe.com
an official body, was 29 – a record year according to the
EDITORIAL DIRECTOR
Fiona Rintoul organisation. Overall, there were 265 foreign firms across
fiona.rintoul@funds-europe.com various sectors that launched or expanded operations in
EDITORIAL ADVISORY BOARD Hong Kong with InvestHK’s help, again a record, though
Penelope Biggs
Northern Trust, London
only modestly breaking the previous year’s record of 257.
With China and Asia often described as being the engines
Dominique Carrel-Billiard
AXA Investment Managers, Paris of global growth in the coming years and beyond, then the figures for foreign
companies setting up in Hong Kong and elsewhere may be less modest in future.
Nadine Chakar
BNY Mellon, London These companies, including fund managers, will of course be competing with
Peter Elam Håkansson
strong Asian companies already here, and a reminder that competition is a two-
East Capital, Stockholm way street – and increasingly a global one, not just limited to Asia itself – is
Robert Parker presented by Harvest Fund Management. Harvest is a firm from Mainland China
Credit Suisse, London and in 2009 it set up a wholly owned subsidiary as part of its Asian and world
Todd Ruppert expansion strategy.
T. Rowe Price, London & Baltimore
Many European asset managers entering Asian markets hope to benefit by
ASSOCIATE PUBLISHER providing access for Asian investors to markets outside of Asia. The trouble is, in
Andrew Chesney
Tel: +44 (0)203 178 5878 places like Hong Kong, as in Europe, there is a home-market bias.
andrew.chesney@funds-europe.com
Hong Kong investors, for example, are well aware of the growth story happening
PUBLISHER on the mainland and are hardly likely to be distracted by lagging Europe. There is
Alan Chalmers
Tel: +44 (0)203 178 5877 now a growing number of credible local players positioned to benefit from this and
alan.chalmers@funds-europe.com leverage it to expand abroad.
ART DIRECTOR But there is hope for those with a typically offshore approach to providing
Lucy Erikson
Tel: +44 (0)203 178 5873
international funds. Distributor Manulife and fund manager Aberdeen, which
lucy.erikson@funds-europe.com both have an Asian presence, report interest in US equities among Hong Kong
CHIEF SUB-EDITOR investors, while Eastern Europe is also quite popular for risk takers (see pp 6, 10
Tania Sansom & 20).
Tel: +44 (0)203 178 5876
However, it could be less than ten years before a fund manager from China,
OFFICE MANAGER
Iain MacArthur
South Korea or India is a global brand, according to Martyn Cuff, of Allianz
Tel: +44 (0)203 178 5874 Global Investors Europe (see p14).
iain.macarthur@funds-europe.com
For foreign managers moving the other way, those firms that claimed a first-
CONTRIBUTORS mover advantage seven or eight years ago will be glad now they did so.
Martyn Cuff

Subscribe to Funds Europe

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Nick Fitzpatrick
Delivery outside Europe: €495 Editor
enquiries: subs@funds-europe.com

funds europe limited, 2010

ISSN 1477-4453

Published by
funds europe limited
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Printed in Great Britain by Buxton Press

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Although the publishers have made every effort to
ensure the accuracy of the information contained in
this publication, neither Funds Europe Limited nor any
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03 contentsASPTS:Layout 1 28/5/10 16:48 Page 3

contents
06 Pensions
US$15bn of pension savings in Hong Kong is
to be up for grabs

10 Mutual funds
Retail investors have reverted to IPOs rather
than funds, but there is some risk appetite

14 Industry growth
Asian fund management brands could be
globally recognised in 10 years

18 India
Interview with Shyam Kumar, CEO of Kotak
Mahindra Asset Management

20 Distribution
Manulife talks about the type of funds that are
in demand among its Hong Kong clients

22 Real estate
In spite of some woes, Asian property has
strong fundamentals, though access is restricted

24 Threadneedle
The firm expects to double its Asia-based
staff, says its regional head of distribution

26 Executive panel
We assemble a virtual roundtable, asking
executives about the Asia funds industry

32 Asset Servicing Roundtable

Asset servicers based in Asia discuss the forces
shaping the funds industry

44 Talking heads
CEOs in the region give us their views about
the industry going forward
4-5 Asia NewsASPTSnf:Layout 1 28/5/10 14:03 Page 4

ASIA NEWS

BNY Mellon wins QDII custody mandate

China Construction Bank (CCB) awarded
the global custody mandate for a new
Qualified Domestic Institutional Investor
(QDII) fund, to be launched by ICBC Credit
Suisse Asset Management (ICBCCS), to BNY
Mellon Asset Servicing.
The new fund will be called the ICBCCS
Global Selected Equity Fund.
ICBCCS is the first fund management
company to have two QDII products on the
market following the completion of the new
fund’s fundraising. The firm’s first QDII fund,
the Global China Opportunity Equity Fund,
was launched in 2008. CCB, on the other
hand, is one of the largest providers of
domestic custody in the Chinese market, from
both QDII and QFII perspective.
ICBCCS is the first asset management joint
venture initiated and held by a commercial
bank in China. It is owned by the Industrial
and Commercial Bank of China, Credit Suisse up to the end of March, it is clear that the insurance firms, to invest funds pooled from
and China Ocean Shipping, who hold 55%, door is wide open again after being closed for their mainland clients in approved overseas
25% and 20% of the company, respectively. about 15 months.” financial markets.
Following the mandate win, Chong Jin The State Administration of Foreign In other QDII news, Canada is looking to
Leow, head of Asia, BNY Mellon Asset Exchange suspended the issuance of QDII benefit from asset pools in China. Jim
Servicing, said in a statement: “QDIIs have quotas in May 2008 after the crippling Flaherty, Canada’s minister of finance,
had a difficult ride over the last couple of market losses, which reached 80% in certain welcomed an agreement with the China
years, due in part to the reduction in investor cases. The ban was lifted last October when Banking Regulatory Commission that
confidence triggered by the global financial the regulator perceived that the global designates Canada as a destination for
crisis. However, confidence is rapidly economy was past the worst. Chinese banking wealth management
returning and with in $4.2bn (€3.4bn) worth The QDII programme allows approved business. “This agreement will give Canadian
of QDII quotas granted by the State institutional investors in China, including financial markets access to up to US$8bn in
Administration of Foreign Exchange in 2010 banks, fund management companies and investment capital,” said minister Flaherty.

Alfi to open Hong Kong office

As Ucits continues to have a strong hold on Asia and many global fund distributors and
Asian investors, the Association For fund managers have large operations in this
Luxembourg Investment Funds (Alfi) part of the world.
announced it will be opening a representative In terms of headcount, Kremer said that to
office in Hong Kong, to further support start off with, the office will probably staff just
the development of the Ucits brand across one person. “This person will play quite an
the region. ambassadorial role. We think that having a
President Claude Kremer said: “We hope for person locally to talk to the investors and the
the office to be operational by the middle of fund promoters in the region will help us
summer.” He explained how the association better develop our relationship with the actors
plans to create an Asian hub in Hong Kong. in the industry.”
“Out of the new office we will be able to cover He said that Alfi chose to begin its
a number of the Asian markets such as international expansion in Asia because the size
Singapore, South Korea and even Australia.” of the Asian representation in the overall Ucits
At the recent Alfi conference in London, market. Kremer added: “I have no concrete
Kremer said that one third of the Ucits plans of how this will develop and grow in the
Claude Kremer, Alfi
subscriptions registered in 2009 emanated from future, but it’s a foot in the door.”

4
4-5 Asia NewsASPTSnf:Layout 1 28/5/10 14:03
Funds back in black, but bonds Appointments
reign supreme in Asia
Asian fund flows improved in the last quarter
of 2009, with Southeast Asian mutual fund
assets reaching an all-time high, but net new
money favoured low margin products as
opposed to equity funds.
Market analysis by Cerulli Associates, a
consultancy firm, showed that Asian net flows
for the last quarter of 2009 came in at just less
than US$3.4bn (€2.7bn), which is positive
considering they were in the red to the tune of
approximately $35bn in the third quarter of
the year.
The consultant found that overall assets under
management in Asia rose $88.6bn between
September and December 2009, showing that
market appreciation did the heavy lifting in the
asset recovery. According to Cerulli, India,
Taiwan, and China registered the best flow
performance in the final three months of 2009.
In another Cerulli report, focused on the
Southeast Asian markets, the firm found that
assets under management jumped 42% in 2009
to $145.2bn, surpassing the previous peak of
$133.5bn set in 2007. But although the funds
are back in the black, the flows were
disappointing because of the cautious investor
sentiment.
Lipper FMI statistics showed that, over the
whole of 2009, India recorded the strongest
sales, although they slowed in the last quarter.
Lipper said: “Support for equity had been
inconsistent all year, but industry insiders believe
the banning of sales commission spurred Q4
outflows in the equity category where front-end
loads are highest.” The research house also said
that Thailand was the year’s surprise. The
industry recorded its second best year, with
$18bn and was a billion short of its 2007 best.
“After a visible slowdown in Q3, flows picked up
in Q4. Importantly, equity funds returned to
positive territory,” Lipper said.
But Cerulli found that the net new investment
in Asia was skewed toward bond and money
market products, rather than equity funds.
Data from Lipper FMI supported this,
showing that bonds reigned supreme in Asia
with sales in India and Japan heavily tilted
towards the conservative end of the investment
spectrum throughout all of 2009. As a result,
bonds were the clear winners of the year, with
two thirds of all Asian sales of $63bn.
Page 5
‘Japan's asset
management market still
has ample capacity
for growth’
The Cerulli analysis showed that South Korea
lagged the rest of the region as it was hit by
redemptions from expiring regular savings
plans. With the exception of South Korea, all
countries showed growth in mutual fund assets.
The strongest asset performance was in China.
In fact, Lipper FMI said that unsurprisingly, the
best equity sector was Chinese equity with an
annual sales total of $30bn. However, Cerulli
warned that the prospect of policy tightening in
the country could curb risk appetite and slow
down its stock market.
Cerulli found that Japan lost market share, and
now accounts for approximately 35% of the
region's assets while China, India, and Taiwan
all gained ground.
Interestingly, according to a report by
McKinsey, another consultancy, Japan will
present a much greater opportunity for asset
managers. “Japan's asset management market
still has ample capacity for growth. Although it
is the world's second-largest economy, Japan
currently ranks only ninth in terms of its mutual
fund market,” the firm said.
According to Cerulli, Asia now offers a better-
balanced opportunity set when compared with
the pre-crisis period.
“This is especially so for Asia ex-Japan, since
China no longer dominates as it once did,” the
firm said.
Within Southeast Asia, Malaysia is said to
offer the best expansion opportunities for global
managers, due to a comparatively well-
developed regulatory structure, a fondness for
saving, government backing for the
development of the mutual fund sector, and
high profit margins.
“Expansion into Southeast Asia is best suited
to global managers with an existing Asian
footprint, whereas those new to Asia are better
off focusing on North Asia initially, since its asset
size dwarfs Southeast Asia,” said Sunil Jagtiani,
associate director at Cerulli Associates.
Joachim Faber, AGI
MERCER EXPANDS
MULTIMANAGER INTO ASIA
Stephen Roberts has been appointed
Mercer’s Asia Pacific regional business
leader for investment management, as
the company expands its multi-manager
business into Asia. Roberts will be
responsible for leading the growth and
development of Mercer's investment
management business in the Asia Pacific
region. With the appointment, the firm
is building on its established investment
consulting capabilities and will now
offer its clients in Asia a complete range
of investment advisory services.
RUSSELL CATERS FOR
GROWING DEMAND
Russell Investments announced the
appointment of several senior
executives across Asia, including
Singapore and South Korea. The firm
said the additions were made to
strengthen management to cater for
growing business demand. Edmund
Teo, who will be based in Singapore
joined Russell from First State as
regional director sales and sarketing. For
Taiwan, the firm appointed Joey Chao-
Yu Chen as director business
development and DongKi Kim joined
as chief representative within Russell’s
Korea representative office.
DB ADVISORS MAKES MENA
APPOINTMENT
Nicolas Kahale joined DB Advisors —
Deutsche Bank’s global institutional
asset management business — as head
of the Middle East, Africa & Central
Asia. Roelfien Kuijper, global head of
DB Advisors said: “DB Advisors and
the Deutsche Bank Group are strongly
committed to expanding the services
we offer in the Middle East, Africa and
Central Asia. The need for global asset
management solutions continues to
grow, and we are seeing increasing
demand from both public and private
sector institutions for a wide range of
investment strategies.”
6-8 pensionsASPTSnf:Layout 1 28/5/10 14:05
PRIVATE PENSIONS
Playing the long game
Rule changes may see pension providers competing for US$15bn
of pension savings in Hong Kong, finds Nick Fitzpatrick
The fact that The Hong Kong Jockey Club
is both the largest tax payer and biggest
private contributor to charity funds in Hong
Kong points firmly to the population’s love
for nail-biting finishes that come with the
hope of riches. Similarly, their passion for
trading mutual funds also reflects Hong
Kong residents’ liking of risk if large,
quick returns are in the offing – although
much to the frustration of asset managers
who have to cope with the volatile fund flows
that result.
By comparison, long-term saving for
retirement severely lacks adrenalin, but that
could change following a relaxation of rules
that gives members of Hong Kong’s
compulsory state pension fund more say in
how to invest their money.
6
Page 6
When the Mandatory Provident Fund
(MPF) was set up in 2000, workers had to tie
their contributions to one provider chosen
for them by their employer.
Pension fund members are now set to be
able to invest their contributions with
whichever provider they wish when they
change employment, and this could unleash
US$15bn (€12.3bn).
At least this is the amount of money Terry
Pan, vice chairman of the Hong Kong
Investment Funds Association (HKIFA), says
could be available from the fund, which is a
compulsory defined contribution pension
scheme. “Employees will have the
opportunity to change all of their own
contributions and this means that around
US$15bn could move,” Pan says.
Under one of the three options in the MPF,
employers have to choose a pension plan
from a range of providers for their
employees to pay into, together with an
employer contribution.
Although workers could take their savings
with them when they found a new job, they
still had to invest with whatever provider
their new employer had chosen.
But in future they will be able to invest their
own contributions – 5% of salaries – with
whichever provider in the MPF scheme
they wish.
Any changes they make could start to
happen next year, though perhaps slowly at
first. As the MPF is a young scheme, Pan
believes many members have not yet realised
just how much money they are sitting on.
6-8 pensionsASPTSnf:Layout 1 28/5/10 14:05
The MPF could make for a source of stable cashflows for providers, who
can keep hold of business once the new rule takes effect
Investment changes will not happen until
they do.
“The MPF is only ten years old. Because it
is very young, you have to ask when will it be
that their MPF savings become big enough
for employees to take notice of what they
have saved, and say to themselves, ‘Wow, look
at all that! I’ve got to do something with it’.
“They get an annual statement, so 2011
might be too soon for them to realise this, but
it could be two years from now.”
Current providers of MPF funds include
Invesco and Fidelity, as well as banks and
insurance companies like Manulife.
The MPF could make for a source of stable
cashflows for providers, who can keep hold of
business once the new rule takes effect.
Members are, unsurprisingly, not able to
Page 7
withdraw their savings until they retire. In a
region where individual and institutional
pensions saving still lacks development, the
move by the MPF – which could be seen as
quasi-institution – is a notable one.
Institutional investment
Institutional pension funds are relatively thin
on the ground in Asia, although there are
some. There are, of course, other types of
investment institutions, including sovereign
wealth funds, and, again in Hong Kong, there
is the Hong Kong Jockey Club itself, which
invests primarily to support the club’s
corporate aims.
“There are large corporates in Hong Kong
like the Jockey Club and Swire [a diversified
conglomerate], but the list is not long,” says
Hong Kong Jokey Club
Pan, adding: “After the top 30 names the
mandate size gets extremely small.”
Yet around 50% of the client base that falls
under Alex Boggis, director at Aberdeen
International Fund Managers in Hong Kong,
is institutional, and he believes that
institutional investment within Aberdeen will
grow more than the wholesale sector, which
makes up the other half of his business.
“I expect our share of institutional
investment will grow more than the more
retail side of the business, partly because the
retail segment got hurt by the 2008 crash and
the resultant scandals,” he says, referring
mainly to the collapse of a Lehman Brothers
minibond scheme which scandalised the
Hong Kong public. “It will take a while for
the retail investor to regain confidence.”
7
6-8 pensionsASPTSnf:Layout 1 28/5/10 14:05 Page 8

PRIVATE PENSIONS

He adds: “The institutional market here is
dominated by consultants who have intimated
that institutions were thinking much more ‘The institutional
about restructuring their portfolios after 2008.
This probably means that if you are one of
market here is
the big institutional houses, you will be dominated by
worried about maintaining assets, and if you
are a newer entrant, or just someone
consultants who have
challenging the status quo, you have plenty intimated that
of opportunity.
“We’ve had some pick-up from this and the
institutions were
demand we see currently is for global equity, thinking much more
Asian and emerging market fixed income, and
for domestic equity.”
about restructuring
Fixed income has also included local their portfolios
currency instruments. Regional clients are
said to understand the case for local currency
after 2008’
investment, which hangs on the expected
growth in emerging market currencies. They
also know that government authorities in the
region want to increase the role of bond
markets in raising company finance.
Similarly, Lieven Debruyne, chief executive
at Schroders in Hong Kong, says that there
has been a high level of activity on the
institutional side.
“A lot of the searches we have been involved
in were for global equity, global fixed income
and global emerging markets, rather than
regional emerging markets.”
Debruyne expects the broader pensions
market in Asia to develop along defined
contribution (DC) lines. “The MPF in Hong
Kong has continued to grow, and the pension
fund market in this region will develop mainly
through DC, but on the whole, there’s a long
way to go to build pensions systems in Asia.
“A key factor of the success of 401k plans in
the US was the tax incentives, which we do
not have in Asia.”
Reaching out
For fund managers to find success in the MPF
market, Pan says, it is necessary for players to
reach out to members. “It is no longer about
a provider being able to rely on the fact that it
might know an employer very well. Pension
fund providers and fund managers will have
to talk, not just to the employers any more,
but to the members too.”
The HKIFA has a pensions working group
that has been liasing with the Mandatory
Provident Fund Schemes Authority to see
how the industry can expand the offering in
the pensions sector.
It also has a working group that focuses on
investor education, which is necessary if
Hong Kong residents are to take decisions
about pensions savings for time horizons that
last longer than a horse race.
In June last year, at a meeting of the Hong
Kong Hospital Authority, which runs the
HK$30bn (€3.15bn) Hospital Authority
Provident Fund Scheme, a pension scheme
for health workers that predates the MPF, it
was suggested that the scheme should
give quarterly updates on the market outlook
to facilitate members’ choices when they
switch investments.
The fund suffered significant losses
following the financial crisis. The meeting
noted that 60-70% of the total equity in
lifestyle funds had been invested in the US
and European markets – a significantly
higher allocation than the market average of
40-50%. The Hospital Authority agreed to
introduce a global equity fund and global
bond fund and open up a money market fund
to all members.
The Hospital Authority scheme is part of
the Orso scheme, a voluntary pension system
that was a forerunner of the MPF.
Hong Kong has a rapidly ageing population.
In 2009, the proportion of the population
over the age of 65 was around 13%, but by
2036 this is projected to rise to 26.4% owing
to low birth rates and increasing life
expectancy. Life expectancy is much greater
in Hong Kong than the global average: over
86 for women and almost 80 for men.
Before the implementation of the MPF
system, only about one-third of the Hong
Kong workforce had some form of retirement
protection.
As more people come into the system and
employers and providers expand their
offering, fund managers will inevitably be
expected to play a role in providing high-
quality information for investors to take
intelligent decisions.
Investment choices may not be at the
complex level of hedge funds yet, but absolute
returns are playing a greater role, at least
going by the experience of Gerry Ng,
managing director at Baring Asset
Management in Hong Kong.
“The pension funds that we provide to tend
to look for balanced, multi-asset portfolios of
stocks and bonds. Some are benchmarked and
some are absolute return. I think absolute
returns will feature more in the near future
because pension funds are more focused on
the fact that they could lose 5% even though
the market is down only 3%.” fe

8
Ads:Layout 1 27/5/10 11:51 Page 50

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kind, or a solicitation of an offer to buy or sell any securities, T. Rowe Price products or investment services. Past performance cannot guarantee
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T. Rowe Price, is are trademark and/or registered trademark of T. Rowe Price Group, Inc. in the United States, European Union, Australia, Canada,
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10-12 mutualfundsASPTSnf:Layout 1 28/5/10 16:36 Page 10

MUTUAL FUNDS

Simple risks
The Lehman Brothers downfall has scared Hong Kong investors, with many
of them reverting to buying direct stocks and ETFs, finds Nick Fitzpatrick

When Terry Pan, the vice chairman of the
Hong Kong Investment Funds Association
(HKIFA), arrived home one night and a
workman at his apartment block said that he
was shorting the Canadian dollar through a
leveraged futures contract, the conversation
echoed discussions between chauffeurs and
their Wall Street passengers reported just prior
to the dotcom crash. Drivers had casually
informed the besuited clients over their
shoulders they had bought into hi-tech.
For the Wall Street bankers of dotcom
folklore, retail interest in internet stocks was a
signal to sell the Nasdaq. For Pan, the fact
that a workman was playing currency futures
made the educational programmes that he
works on, both with the HKIFA and within
his day job as head of Hong Kong business
at JP Morgan Asset Management, all the
more pressing.
Hong Kong and Chinese investors certainly
have a spirit of adventure, though this is
hardly surprising given the economic story of
the region. They know what is going on in the
Asian markets as much as Westerners do –
and they too are buying into it.
But any notion that their adventurous spirit
was not dented by the financial crisis due to
their low levels of indebtedness falls down
almost as abruptly as the collapse of the
Lehman Brothers minibond scheme did.
The minibond fiasco took place in the wake
of Lehman’s collapse and harmed some

10
10-12 mutualfundsASPTSnf:Layout 1 28/5/10
40,000 Hong Kong investors. It led to 16
Hong Kong banks agreeing to spend more
than HK$6bn (€0.6bn) to buy back Lehman
Brothers minibonds from around 29,000
eligible customers. In return, Hong Kong’s
Securities and Futures Commission (SFC)
would discontinue its investigations into the
sale and distribution of minibonds by
the banks.
Mutual fund managers have been at war
with banks offering structured products for
years now, but the Lehman problem is said to
have impacted the funds industry as much as
it has the banks’ own product lines.
“People are scared and some of them have
reverted back to type and started buying
direct stocks and using ETFs [exchange-
traded funds]. I do feel that an element of
short-termism has crept back into the
market,” says Alex Boggis, director at
Aberdeen International Fund Managers.
Surge in sales
Yet it is notable that Asian investors were a
large source of inflows for the Luxembourg
Ucits funds industry in early 2009.
It is also notable that fund sales in the
region have surged again. In Hong Kong
there are 2,093 authorised unit trusts and
mutual funds available with a net asset value
of US$628.30bn (end March 2008 – a nearer
figure was not readily available). Net sales in
March 2010 were $971.79m.
In the whole of the first quarter this year
gross inflows increased by 252% over the
corresponding period last year, equalling
$6.425bn. Net inflows were $2.413bn.
Despite the minibonds problem, it would
seem that Hong Kong investors are simply
indomitable, particularly where their appetite
for risk is concerned. The experience of
Lieven Debruyne, chief executive of
Schroders, seems to confirm this.
“Around 70% of our mutual fund sales a
few years ago were equity funds. Although
the percentage of bond funds has gone up,
the interesting thing is that higher-risk bonds
– such as high yield and emerging market
debt – have been very popular.
“This tells me that, with volumes still being
down overall, those investors prepared to buy
funds are still willing to take risk.”
The absence of ‘newcits’ products, or hedge
fund-type offerings that invest long and short,
could account for the take-up of high yield
and emerging market debt by people who
want riskier investments.
16:36 Page 11
Gerry Ng, managing director at Baring
Asset Management in Hong Kong, says:
‘The Lehman minibond “People here tend to go for higher volatility
funds rather than shorting if they want to
issue in the last two take more risk.”
years has upset a lot of He adds that Baring funds that have been
popular in the region are Eastern Europe,
people but it also made global resources, global emerging market and
them understand that high yield.
“The Baring Eastern Europe fund has been
structured products are popular, particularly in Taiwan, where the
very complicated. This fund is a household name,” he says, adding
that the Baring Hong Kong China Fund is
could be a positive Barings’ best-selling fund in Hong Kong and
development for mutual the largest in terms of assets under
management within the Barings stable.
funds in the longer run’ Ng also says that he thinks the Lehman
Brothers minibond issue will ultimately help
mutual funds as people begin to differentiate
between funds and structured products.
“The Lehman minibond issue in the last
two years has upset a lot of people but it also
made them understand that structured
products are very complicated. This could be
a positive development for mutual funds in
the longer run.”
But despite the positive sales figures for
funds, no-one is understating the damage
done by the Lehman Brothers minibond
fiasco to the mutual fund industry among
retail investors. Whereas the average investor
may well grasp the broad market outlooks for
Asia versus Europe and the US – “Investors
here are pretty savvy and pay close attention
to what’s happening in the US and European
markets,” says Ng at Barings – knowledge
about how to play those markets through
managed products rather than direct stocks
still has some way to go.
Pan, at the HKIFA, says: “The investor
probably does not differentiate between fund
managers and other types of providers. They
look just at the product and do not see any
particular differences.”
In Hong Kong, and to some extent in the
broader region, a wave of educational
programmes is being rolled out.
The Hong Kong SFC has proposed the
launch of an investors’ education council.
Meanwhile, the HKIFA has launched its own
initiative and an education panel forms one of
its three working groups.
“The industry as a whole has been doing a
lot of education in the past year,” says Pan,
while his own firm, JP Morgan Asset
Management, has held a series of brand-
agnostic investor classes for members of the
11
10-12 mutualfundsASPTSnf:Layout 1 28/5/10
MUTUAL FUNDS
public to explain key nuts-and-bolts details
about funds, such as the fact that assets
are segregated from a fund manager’s
balance sheet.
Notably, the unit trust subcommittee of the
HKIFA, which has responsibility for investor
education, also focuses on distributors,
indicating that in Hong Kong, as in Europe,
like a firm that has been
fund promoters feel that distributors also need
to be better informed about the advantages of
funds and the correct way to sell them.
Needless to say, the rapid turnover of
mutual funds by investors in Hong Kong and
China plays into the hands of distributors
who sell them. But market players report that
although distributors have been much more
reticent to sell structured products following
the Lehman minibond scheme, mutual funds
have not filled the vacuum in third-party
distribution channels.
One reason, of course, could be lower fees
earned by distributors for mutual fund sales.
Not that this has hurt ETFs, it would appear,
and these tradable-indices products are a
further challenge to managed funds.
Patrick Ho, managing director of iFast
Financial, a financial adviser platform, notes
that ETFs have seen an uptick in sales, despite
the fact that those products also command
lower margins for distributors.
“I think structured products will always be
there and funds will be constantly facing
challenges. ETFs are affecting mutual fund
sales at the moment. Their volumes are quite
high even though advisers do not make much
margin on them.”
He adds: “ETFs will be very, very important
in efficient markets. At the moment fund
managers are finding it very difficult to
outperform the markets, except in emerging
markets where they can easily outperform
indices with active management because the
markets are less efficient.”
The Hong Kong regulator, according to Pan,
who chairs the regulatory working group at the
HKIFA, is working to standardise rules
between structured products and mutual
funds. In the meantime, banks see structured
products as being taboo, and the regulator is
signing fewer off.
“The issuance of new structured notes over
the past nine months has been very, very little.
In the past it was easy to launch these products
to retail investors. A lot of issuers thought that
a $20m deal would be sufficient for them but
yield is so low now that is hard to do an issue
that is attractive enough.
12
16:36 Page 12
“Investment banks are not launching these
products now partly for reputational reasons.
‘Investors treasure the Also, they are a little taboo with distributors.”
Pan adds: “Investors treasure the reputation
reputation of the of the product provider. They like a firm that
product provider. They has been working with the Hong Kong
authority for a long time. Lehman Brothers
had not been very transparent to Hong
working with the Hong Kong retail investors, but at least it was
known to be the fourth largest investment
Kong authority for a bank in the world.”
long time’
Staying local
Those brave Hong Kong investors that can put
the Lehman Brothers minibond collapse aside
and continue to invest (or rather trade, given
the Chinese infamous tendency to turnover
funds quickly) in mutual funds, then, are
surprisingly still seeking risk in high-yield and
emerging markets.
But the funds that look likely to sell well in the
nearer future are generally targeting markets
closer to home.
The recent inflows to equity funds were
primarily registered by only three categories,
namely Greater China Region equity,
emerging markets and sector funds. Altogether,
they pulled in $2.409bn, accounting for about
72% of the total inflows into equity funds.
“For China mainland investors looking to
take advantage of the QDII schemes in the
last few years, it is unfortunate that they had
started to diversify outside of China, and then
suddenly the world collapsed,” says Boggis, at
Aberdeen. “This has resulted in a definite
slowdown in QDII activity – which is a
shame. The perception that there should be a
stronger Chinese currency has also dampened
investors’ enthusiasm, in this regard.”
Nevertheless, Aberdeen – which though
mainly an institutional house in Hong Kong,
also has a significant wholesale distribution
too – plans to promote more US equity later
in the year.
“Our strength is in stock selection and we
can see that there are some great companies
in the US, despite the macro issues. Our
investment process for equity is already well
respected and now utilised globally. We feel it
is time to tell clients about the product,
especially as a number of investors in Hong
Kong have gone passive on US equity, which
we intuitively think is probably the wrong
way to go.”
But now is not necessarily the time for
workmen to go long on the US dollar through
futures contracts. fe
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14-17 industrygrowthASPTSnf:Layout 1 28/5/10 16:27 Page 14
INDUSTRY GROWTH
A force to be reckoned with
How long will it take for Asian fund management companies
to become a global competitive force, asks Martyn Cuff,
managing director of Allianz Global Investors Europe
Looking at the chronology of the global
fund industry, and if you assume it started at
the same time as stock exchanges were What is clear is that
formed, then the European fund influence is shifting
management industry has the longest history
(around 400 years ago), followed by the US from Europe and the US
(started around the end of the 18th century) to other parts of the
with Asia being the most recent entrant into
the business. Mind you, Bombay claims to world, namely Asia,
have had a stock exchange since 1875, so Latin America and the
‘recent entrant’ is a subjective term.
However, the past 400 years of history Middle East
should not necessarily be seen as an indicator
for the next 400 years or even the next 40.
Between 2010 and 2050, there will be many
14
economic and demographic changes,
estimates of which are highlighted in the
table overleaf.
What is clear from these statistics is that
influence is shifting from Europe and the US
to other parts of the world, namely Asia,
Latin America and the Middle East. This has
been underway for some time and is not a
surprise to anyone. The question is how this
affects the emergence of future fund
management businesses, particularly in Asia.
There are plenty of examples of Asian
companies that have become global brands.
These include industries such as motor
vehicles, electronics and heavy plant
14-17 industrygrowthASPTSnf:Layout 1 28/5/10
machinery. In addition, we have seen Asian
banks venturing beyond their national
borders for a numbers of years. However,
why have we not already seen Asian fund
management companies playing on the
global stage especially since the barriers to
entry into money management are very low
and there is always scope in our industry for
new creativity?
The early stages
Before the internet era, companies in most
industries would typically start to build their
business in their own country. They would
establish a strong presence and use profits
from their domestic business to expand
abroad. While the internet potentially allows
companies to go global much more quickly, it
is still mostly a case of going local first, then
global. With this in mind, there is clear
evidence that we have seen the first stage of
the Asian fund management industry. This is
being accompanied by:
• Economic growth
• Increased cross-border trade
• A growing savings pool (be that
individuals, sovereign wealth funds, pension
funds)
• The greater embracing of capitalism
• The development of capital markets
All of this activity, in turn, breeds a
growing population of investors, both
institutional and retail. Examples are:
South Korea: There are 10,000 mutual
funds domiciled in Korea, almost twice as
many as in the US, whereas the population is
one fifth the size. Most of the funds invest
domestically and it is mostly Korean fund
companies that dominate. The largest player
is Mirae Asset, which has a 25% market share.
India: There are around 30 fund
management businesses in India. These are
joint venture companies such as ICICI and
Prudential, BNP Paribas and Sundaram,
Sun Life of Canada and Aditya Birla Nuvo,
plus fully domestically owned firms such as
GLOBAL ECONOMIC AND DEMOGRAPHIC CHANGES
Category
Top 5 countries, ranked in order of nominal GDP
World population
16:27 Page 15
There is still a long way
to go before the Asian
domestic fund
management industry is
at a fully mature stage.
Even so, there are a few
early signs that sights
are being raised beyond
domestic boundaries
2010
USA, China, Japan, Germany, France
Asia 59.5%
Africa 14.5%
Europe 11%
Latin America and Caribbean 8.5%
North America 5.5%
Others 1%
UTI Asset Management, Reliance Asset
Management and SBI Fund Management.
China: Like India, the local authorities
have encouraged established non-Asian
companies to enter the Chinese market
through joint ventures. This is a calculated
way of opening the Chinese capital markets
in a controlled fashion while allowing the
importation of skills and knowledge from
developed nations so help the establishment
of the Chinese fund management industry.
In addition, some domestic fund companies
have been established, such as China
Asset Management and China Southern
Fund Management.
However, we should not get ahead of
ourselves. There is still a long way to go
before the Asian domestic fund management
industry is at a fully mature stage. Even so,
there are a few early signs that sights are
being raised beyond domestic boundaries.
The next phase of development
This natural next phase of the industry’s
development is strategically significant,
certainly up there with the expansion of US
money managers outside of the US in the
1970s and ‘80s and the introduction of ETFs
around the turn of the century.
There are several drivers that will push this
next phase forward and these are:
• Desire to see national champions: Certain
countries are not hiding their ambition to
create national champions in a wide range of
industries and the fund management
business is no different. This is both as a
defensive measure, given the strength of
established non-Asian firms, and as an
offensive measure to establish a share of the
growing global marketplace.
• Desire for growth and scale: While Asia
has the majority of the world’s population,
today they do not dominate the store of
wealth. In addition, the capital markets are
not mature in the various countries, plus the
culture of investing is not fully embedded. As
2050
China, USA, India, Brazil, Mexico
Asia 59%
Africa 19.5%
Europe 7%
Latin America and Caribbean 9%
North America 4.5%
Others 1%
15
14-17 industrygrowthASPTSnf:Layout 1 28/5/10
INDUSTRY GROWTH
such, the actual size of the fund industry is
relatively small, albeit growing rapidly.
Accordingly, a successful fund business can
find natural domestic growth limitations
relatively quickly and will be forced to look
beyond domestic boundaries. In China, for
example, they are doing this by establishing
funds in Hong Kong for QDII purposes so
that the domestic savings pool of China can
be channelled into global markets. It will be
no surprise for a Chinese investor, who is
considering investing outside of China, to go
through a company that is well known to
them or at least has a strong existing brand.
Another example is the Indian company
16
16:27 Page 16
Birla Sun Life Asset Management, which has
very recently announced its plans to expand
into Singapore as a first step to developing a
global fund management business. In South
Korea, with Mirae’s 25% domestic market
share, it has already expanded abroad to
locations such as Brazil, India and the UK as
well as in Luxembourg where it operates a
Sicav. This is impressive for a company that
did not exist 15 years ago.
• Recognition of competitive advantage in
managing money: There is a major trend at
the moment that sees many investors moving
away from their ‘home bias’ and allocating
assets to emerging markets. Given the future
economic and demographic situation, this is
set to continue. It is quite feasible that Asia-
based fund management companies will
claim that they are better placed than
anyone else to handle this money, given their
potential competitive advantage of being
from the very emerging markets in question.
Is it so difficult to imagine a fund buyer in
the US or Europe adding a South Korean or
Chinese fund management company to their
buy list for exposure to these respective
equity markets?
• Demand for Asian money management:
Building upon the above point, it can be
argued that even if there is no local
competitive advantage, there will be increased
demand for Asian investment skill. Supporting
this is the fact that Asian GDP and market
capitalisation will become larger, both absolute
and relative. Hence, global benchmarks will
see an increasing Asian component, which in
turn requires money allocated to this region, to
be managed. Statistics from Cerulli also show
that Asia ex-Japan has the highest growth of
assets under management by region which
further supports the notion that the
importance of Asian money management will
increase. In an interesting twist to this point, in
2009 Deutsche Asset Management transferred
There is a major trend its Hong Kong equities and Greater
at the moment that sees China teams to its JV partner, Harvest
Fund Management.
many investors moving • Distribution power: Domestic financial
away from their services companies in Asia have potential
distribution power, whether these are
‘home bias’ and insurance companies, banks or agent
allocating assets to networks. Without access to such networks,
non-Asia fund management businesses
emerging markets struggle to gain traction, whereas for the
local Asian businesses, such distribution is a
powerful weapon. To date, Japan is a good
example of this, though this experience is
14-17 industrygrowthASPTSnf:Layout 1 28/5/10 16:27 Page 17

also being played out in other Asian markets.
Interestingly, looking the other way, it is not
yet that easy for Asian fund managers to It is hard to see why
establish distribution outside of their
domestic markets. As ever, distribution
fund management firms
remains critical to the dynamics of a fund from China, South
management business.
• Insurance asset investing: With the
Korea or India will not
insurance industry set to grow in Asia, this be recognised brand
will result in the need to invest the insurance
assets, eg premiums and contributions, just
names in the global
like in any other region. Given that 59% of marketplace within the
the world population is based in Asia and
there is a growing middle class, then this has
next ten years
the potential to be a significant source of
money to be managed. It is understood that
Franklin Templeton has a relationship
established with China Life for the sole
purpose of managing their insurance pool
of assets.
Timescale
So how long will this next phase take to play
out? It took Honda Motorcycles 20 years to
break out of its domestic market and become
a real player in the European/US markets.
Given that today the world is more global
and interconnected and given that the
process of Asian companies venturing
beyond their domestic markets is already
underway, it is hard to see why fund
management firms from China, South Korea
or India will not be recognised brand names
in the global marketplace within the next
ten years.
This means that the existing fund
management companies from Europe and
North America will see increased
competition and this should ultimately feed
through to benefits to the end consumer of
investment products.
As for the established global fund
management companies, they have a head
start over domestic-only Asian firms since
they already have global experience plus will
claim a certain degree of local expertise in a
variety of world markets. Accompanying
this, the best talent in Asia may be drawn
to already well-known and established
worldwide firms. It will be fascinating to
see how these two forces play out over the
years ahead. fe

17
 PROFILE

Passage to India
International in focus, Kotak Mahindra Asset Management hopes to
become the first port of call for foreign investors, reports Fiona Rintoul

‘Think Investments. Think Kotak’. So runs

Kotak Mahindra Bank’s corporate slogan.
And it’s a mantra that Kotak Mahindra Asset
Management Company Limited (Kotak
Mahindra AM) has sought to export
worldwide, as it seeks to make itself the first
port of call for international investors looking
for exposure to India.
Launched in 1998, Kotak Mahindra AM is a
wholly owned subsidiary of Kotak Mahindra
Bank, one of India’s first privately owned banks.
The bank, which this year celebrates its 25th
anniversary, started life as a corporate in the days
when India’s banks were state run. It converted to
a bank in 2003 – the first time in India’s history
that a corporate has done this – when it received
one of two banking licences granted to private-
sector enterprises. For this reason, says Shyam
Kumar, CEO of Kotak Mahindra (UK) Limited,
the international arm, Kotak Mahindra
describes itself as a “20-year-old new bank”.
Since the company was founded in 1985 by
Uday Kotak, who, says Kumar, could have
gone to work for any of the big international
banks but preferred to roll out his own venture,
growth has been breathless. When Kumar
joined the bank in 1992 it had around 100
employees. Today, after what he describes as “a
wonderful story”, Kotak Mahindra Bank
employs 20,000 people across the group and
has a market capitalisation of $7bn (€5.7bn).
Alongside asset management, the group’s
business spans retail and investment banking,
life insurance, wealth management, real estate
and private equity. It has over 260 bank
branches in India, where it is the fourth largest
bank overall and the third largest in the private
sector. “In wealth management,” says Kumar,
“we are arguably the largest in India.”
But what really sets the Kotak Mahindra
group apart among Indian financial services
companies is its international business.
“Internationally, Kotak was very much ahead
of its time,” says Kumar. “We had our first
international office in 1994 and in 1995 we
opened in London. We were one of the first
Indian financial services players to come

18
outside India and we are one of the few Indian
players to have a significant presence both at
home and abroad.”
Kotak Mahindra learnt how the international
markets work from the masters of universe. On
the investment banking side, it had a ten-year
relationship with Goldman Sachs. “We got a
fantastic understanding of how international
business works because of the Goldman Sachs
joint venture,” says Kumar.
The investment banking JV was recently
wound up when Kotak Mahindra bought back
the Goldman Sachs shares, but a joint venture
on the life insurance side with Old Mutual
persists. The South African company owns
26% of Kotak Mahindra’s life insurance entity.
International focus
Today, alongside its office in London, Kotak
Mahindra has offices in Dubai, Singapore,
Mauritius and the US, where it is present in
both New York and San Francisco. Kotak
Mahindra Securities also has an office in
Bahrain. In total, about 60 staff are
employed outside India. Their objective, says
Kumar, is “to provide Indian solutions to
international investors”.
This is stage two in a four-stage business plan.
The first step, says Kumar, was to provide
Indian solutions to Indian investors. The third
stage – already embarked upon – is to provide
global solutions to Indian investors. This isn’t a
key strand at the moment, partly because
Indian investors are heavily focused on the
domestic market due to the high growth rates
available, and partly because exchange controls
have not been opened up completely, although,
at $200,000 per person, limits on investment
overseas are now generous.
“There are investors who have been in India
for many years, who would like to look at
diversification,” says Kumar. “We are working
on that opportunity and we have identified a
few players we could work with.”
At the moment, the Kotak Mahindra AM
range available in India includes a global
emerging markets equity fund and the Kotak
Indo World Infrastructure fund, which invests
in companies likely to benefit from the growth
in infrastructure spending in India and across
the world.
The fourth stage – global solutions for global
investors – is very much for the future.
However, a significant step to facilitate stage
two was taken two and a half years ago when
Kotak Mahindra (UK) launched its
Luxembourg Sicav in 2007.
‘India and Europe are
similar. In India each
state has its own
language and culture.
We understand that
about Europe because
we have it back home’
It was perhaps not the very best of times to
launch the Ucits III-compliant Indian Multicap
subfund. “The global crisis had nothing to do
with India, but India suffered,” says Kumar. But
after a stuttering start caused by the 2008 credit
crunch, investor interest has picked up enough
for Kotak Mahindra AM to add two further
subfunds: the India Infrastructure and Realty
fund launched in November 2009, which
invests in companies operating in the
infrastructure and real estate sectors rather than
in the assets themselves, and the Indian Growth
fund, which focuses on large-cap investments,
launched last March.
Investors who were sitting on cash are now
redeploying it, says Kumar, and European
investors in particular are increasingly
allocating to emerging markets. “Money will
move at a higher pace towards the East, and
India’s share of that will increase,” says Kumar.
“Institutional investors are increasingly looking
at allocations to India.”
In the future, Kumar expects India to
compete particularly well against that other
great emerging markets hopeful: China. When
people argue that India’s infrastructure is not
as good as China’s, Kumar likes to point out
that India is achieving the same growth levels,
despite its poor infrastructure. Think, then,
what it will achieve when the infrastructure
improves.
The main theme driving an anticipated
Indian GDP growth rate of 9% for this year is
the same as that driving Chinese growth:
domestic consumption. As India urbanises,
consumption will increase, says Kumar; people
moving to the cities will buy houses and
consumer products.
To do this, they will need financial services
products, and so he is particularly bullish on the
banking sector. “Consumption will increase and
the banking business will benefit,” he says.
“India is still very underpenetrated, and so the
scope is huge.”
To better capture the many international
investors who will want exposure to India’s
growth story, Kotak Mahindra is stepping up
its international operations, investing in
products, people and technology.
“We are investing more and more resources
in the international business now,” says
Kumar. “The opportunity is big and we are
well positioned to benefit because we already
have 15 years’ international experience. We
can only build on that.”
Thus, Kotak Mahindra AM plans to launch
more Luxembourg funds and to bring funds
currently domiciled in Mauritius to
Luxembourg. A Luxembourg domicile is an
essential prerequisite for many European
investors, and Europe is viewed as a key
target market by Kotak Mahindra AM, not
least because it has a familiar feel for the
Indian company.
“India and Europe are similar,” says Kumar.
“In India each state has its own language and
culture. We understand that about Europe
because we have it back home.”
This understanding may help Kotak
Mahindra AM avoid some of the mistakes
made by US firms when they first started
selling products in Europe. Who can forget
encountering visitors from across the pond in
the early days who seemed genuinely to
believe that one day soon everyone in Europe
would speak English as their first language?
Kotak Mahindra AM seems much less likely
to look for one-size-fits-all solutions. Certainly,
Kumar, who is in charge of global distribution
of Kotak Mahindra AM’s funds, displays a
keen awareness of regional differences when
talking about his distribution strategy.
“It depends on the jurisdiction,” he says. “In
the US we work with a lot of pension funds
and endowments. In Europe, it’s more private
banks. In the Middle East, we work with a lot
of family offices. In certain regions local banks
are more powerful than national banks.”
A diversified approach is also one of the
main benefits Kumar believes his company
can bring to international investors looking to
invest in India. While other companies may
offer an India fund – possibly managed from
London, Frankfurt or New York – Kotak
Mahindra will ultimately offer a whole range
of India funds.
“The India story can be cut in different
ways,” Kumar says. “We want to give all
possible solutions.” fe
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20 distributionASPTSnf:Layout 1 28/5/10 14:06 Page 20

DISTRIBUTION

Hong Kong dividends

Manulife Asset Management handles over $2bn for Hong Kong investors.
Nick Fitzpatrick finds out what type of funds are most in demand

Responding to the global downturn last year,

Manulife Asset Management (MAM), part of
the Canadian-based insurance and financial
services firm Manulife Financial, launched an
Asia value dividend equity fund. “Dividends are
often regarded as a cushion during hard times,
providing investors with support against
excessive falls in equities when the market goes
through corrections,” says Raymond Kong,
assistant vice president and product manager for
MAM in Hong Kong.
MAM offers 28 mutual funds to
predominantly retail investors in Hong Kong
and uses both internal and external fund
managers. The firm manages US$2.3bn
(€1.8bn) for Hong Kong investors.
The dividend fund is managed by Value
Partners Group, an independent asset manager
in Asia Pacific. The fund, part of a global fund
platform that includes a European growth fund
and thematic funds like healthcare, is up 8.78% perhaps surprising, given the demand for
since its August 2009 launch, which compares to property in Hong Kong.
the MSCI AC FEE Free ex-Japan Index return ‘People love real estate “People love real estate in Hong Kong,” says
of 6.13%. Morin. “We have a couple of real estate funds,
Other external fund managers that Manulife
in Hong Kong. We have but real estate has not attracted the assets that
uses – which number six in total – include the a couple of real estate you might imagine. Fractional ownership has
investment management division of banks not attracted people as much as the real asset
Société Générale and BNP Paribas, and
funds, but real estate has, but the real asset is priced out of most
Charlemagne Capital, an independent manager has not attracted people’s reach.”
that specialises in emerging market equities. In November 2009, MAM announced it had
Kong says that when selecting managers,
the assets that you signed an agreement to purchase Fortis Bank’s
Manulife tends to choose managers that can might imagine’ 49% ownership in ABN Amro TEDA Fund
manage more than one fund for the firm. Management, a joint venture in China, for
The dividend fund invests in companies €105m. The new joint venture, which will be
that derive significant income from Asia ex- called Manulife TEDA Fund Management
Japan, such as Thailand, Taiwan, Singapore “In Hong Kong, people want exposure to Company, will provide traditional retail and
and China. overseas markets like Russia from us. institutional asset management across the
The focus of Manulife in Hong Kong is very Charlemagne Capital manages emerging mainland China market. This should enable
much on Asia and emerging markets. market Europe, and also manages other funds.” Manulife (International) to provide Hong
Kong says: “People in Hong Kong have a Beyond emerging markets, Morin says that US Kong investors with access to the Chinese A-
greater risk appetite, and emerging markets are funds have sold well lately, but the last three share market.
in our backyard.” years have been characterised by Asia, while last Morin says: “There is a home-country bias
Myles Morin, vice president, independent year bond funds were popular. wherever you are, plus, if you are sitting on the
distribution & investment funds at Manulife “Bonds are 30% of our mutual fund business doorstep of all that growth happening in China
(International) adds that emerging Europe is now as opposed to 15% a few years ago.” and Asia, then you are inevitably attracted to it
also popular among local investors. Real estate has had limited success, which is because you live here.” fe

20
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22-23 realestateASPTSnf:Layout 1 28/5/10 14:06 Page 22

REAL ESTATE

No entry
Asian property ranged from the best – Hong Kong – to the worst – Japan –
performing markets last year. Nick Fitzpatrick talks to two real estate fund
houses in Hong Kong that have launched Asian businesses in recent years,
and finds solid fundamentals, but restricted access for institutions

With good fundamentals in most Asian

property markets, foreign investors from the US
and Europe are keen to diversify their real
estate exposure to Asia. But there is a problem,
particularly in Hong Kong; access.
“Look at all those properties outside the
window,” says Thomas Au, director of Asian
research at Invesco Real Estate, as he stares out
from the 32nd floor of Three Pacific Place,
Invesco’s base on Queens Road East, Hong
Kong. “They are all owned by developers and
developers tend to keep hold of their properties.
“Because the real estate market in Asia is
largely dominated by developers, the presence
of institutions is not very big.”
There have been some sales to institutions,
says Au, but not of premium real estate.
“Developers tend to sell second-grade
properties through Reits [Real estate
investment trusts] listed in Hong Kong and
Singapore,” Au says.
At JP Morgan Asset Management, Douglas
Sung, managing director for real assets, is also
looking out of a window, this time from the
19th floor of JP Morgan’s Exchange Square
office in Central. Sung notes another obstacle
that lies between investors and Hong Kong
real estate.
“Real estate in Hong Kong is difficult to
diversify in because the necessary investment is
so big. One of these buildings out there could
easily cost a multiple of billions of US dollars,”
he says.
Despite these factors, both Invesco and JP
Morgan have launched Asian real estate
businesses in recent years – Invesco in 2006 and
JP Morgan in 2007.
Invesco has eight investment professionals
spread across Hong Kong, Shanghai and Japan.
Au says the team is in the process of assembling
a portfolio of residential and commercial
property in the region.

22
22-23 realestateASPTSnf:Layout 1 28/5/10
Meanwhile Sung says JP Morgan Asset
Management was one of the first to manage a
closed-ended real estate fund concentrating on
Greater China. The fund owns, among other
developments, a Shanghai office development
and a serviced apartment in Beijing.
Vintages and bubbles
Both firms were established by the time Asian
real estate witnessed what Sung calls a vintage
year between 2007 and 2008.
This ended with the financial crisis in 2008. In
China the crisis saw the government launch a
series of measures designed to stop markets
overheating, which caused a downturn in
Chinese real estate, says Au.
“The Chinese government has since
launched other measures designed to pick
markets up and these have helped real estate,”
he says. “In 2009 the market rebounded,
particularly in residential.”
It certainly did. Residential prices increased
more than 30% in Hong Kong and China,
surprising everyone.
The volatility is amplified by the fact that
Hong Kong’s currency is pegged to the US
dollar. This means that an economy already
witnessing growth is importing monetary policy
from a country that is struggling to boost its
economy with growth measures.
Au says: “In Hong Kong we do not have our
own monetary system and, in essence, it is
controlled by the US. The economic
fundamentals of Hong Kong are largely
influenced by growth in China. We are
importing Chinese growth, but also US
monetary measures designed to support growth.
This leads to volatility.”
It has also resulted in cheap lending rates. In
Hong Kong, floating-rate residential mortgages
can be as low as sub-1%, yet Au tries to diffuse
any concern about a residential property bubble.
“We think the residential market will not
deliver good returns for the foreseeable future
because prices are too high,” he says. “But we do
not expect a collapse. A bubble is when prices go
beyond affordability and when people become
overleveraged. But people here are not
overleveraged. The ratio of lending to deposits is
in fact very low so people are not putting too
much pressure on their balance sheets.
“If US rates go up, then obviously there would
be an adverse impact, and US rates will go up
one day. But we still do not expect the kind of
collapse like during the Asia Crisis when there
was a 70% drop in prices from 1997 to 2003.
The odds of that occurring appear low.”
14:06 Page 23
Sung, at JP Morgan, adds: “A key difference
between Hong Kong, China and Western
real estate markets is leverage. Banks in
China want a 30% down payment and it is
even higher for second homes. In China, a lot
of buyers pay cash.
“A lot of home owners have a cushion in
equity if there’s a downturn. In 2008 there
was a fairly sharp fall in prices, but there was
not any panic, no foreclosures and few
distressed sellers.”
Sung expects a 5-15% contraction in
the market.
Limited supply
Price appreciation in commercial real estate
has not been so severe, says Au, and this is
where Invesco’s main interest lies at present.
“The [Hong Kong] office market still offers
quite good opportunities. Vacancy rates are 5-
6%, which is very healthy.
“Supply is extremely limited in all sectors.
Retail is a positive sector but it is difficult for
institutions to tap into because the properties
are owned by developers.”
Au expects to see increased interest in
Japanese residential and commercial real
estate, particularly if there is a correction there.
“The initial yield in Tokyo is around 5.5%
to 6.5% and this is attractive. Long-term
bond yields in Japan are very low so there is a
good spread.”
Sung says that JP Morgan’s Greater China
fund is invested one-third in the office sector,
around 40% in residential and the rest is split
between retail and other sectors.
He says that 90% of JP Morgan’s Greater
China real estate focus in Asia is on China.
Beyond this, the firm runs an Indian real estate
portfolio which is invested 60% in residential
with the rest in offices and hotels. An Asian
infrastructure fund invests in facilities such as
toll roads and a hospital, along with associated
commodities such as cement.
JP Morgan’s client base for its real estate
investments in Asia are existing clients for
portfolios elsewhere, namely US and European
pension funds.
“It will be difficult for the Hong Kong market
to become institutionalised because of the
limited supply, but it will get there. However,
there will be more institutional investment in
China in future due to the size of the market.”
Au notes that in China there has been
a relaxation of regulations concerning
investment in real estate by domestic
insurance companies. fe
‘We think the residential
market will not deliver
good returns for the
foreseeable future
because prices are too
high. But we do not
expect a collapse’
ASIA REAL ESTATE OUTLOOK
China: Benefited from government fiscal
and monetary support policies, but price
correction could happen in the second half
of 2010 as government reduces support.
Retail will be supported by strengthening
demand. Massive new supply will bottom
out the office market, presenting long-
term opportunities.
Japan: Prime office values plummeted by
40% on average in 2009, making it the
worst performing Asian real estate market.
But stabilising rents and high yield spreads
could prove positive.
Hong Kong: One of the best performing
markets worldwide in 2009. Still has strong
long-term fundamentals due to economic
recovery, healthy exports and private
consumption. But residential prices may
have hit a cyclical peak in the near term.
Interest rate and monetary policy risks exist.
Singapore: Office hit hard with rents and
capital values falling due to oversupply.
Market fundamentals are improving with
recovering business confidence. Retail
helped by the opening of two integrated
resorts. Modest rental growth in residential.
Source: Invesco Real Estate Asian House View,
Spring 2010
23
24-25 threadneedleASPTSnf:Layout 1 28/5/10
STRATEGY
Asian
ambition
Threadneedle has high expectations of the Asian
market. Nick Fitzpatrick talks to William Lowndes,
Asia head, about the firm’s route to market
Threadneedle, the London-based fund
manager, expects to have doubled its Asia-based
staff by the end of the year following the arrival
of William Lowndes to Hong Kong in April to
expand the operation.
Lowndes, head of Asian distribution, said
the current staff, split between Hong Kong
and Singapore, will double from ten to more
than 20 by the year end as part of the
expansion drive that has seen Threadneedle
gain a significant – albeit still limited – position
in the Asian market through a relationship
with Standard Chartered Bank, the UK-listed
bank with a substantial Asian and emerging
market presence.
Like many fund managers, Threadneedle sees
Asia as an opportunity that cannot be ignored.
“There is a fundamental growth in savings
and investment products in Asia and you
cannot generate an economic scenario that
would see similar growth rates in Europe and
24
14:07 Page 24
the US because of their maturing populations,”
says Lowndes.
A major part of the Asian strategy was the
acquisition from Standard Chartered of a
Luxembourg-based Sicav fund range called
World Express last year with assets under
management of US$2.38bn (€1.94bn).
Lowndes says: “We were always going to enter
Asia but were fortunate to enter into the
relationship with Standard Chartered and
acquire a Sicav used in Taiwan and more
generally in Asia.”
Whereas Threadneedle runs UK Oeics in its
broader organisation, the Sicav structure will
facilitate Threadneedle’s product development
in the local market. Luxembourg Ucits-
compliant funds, structured as Sicavs, are highly
regarded in Asia.
Lowndes says: “It is easier to develop products
within a Luxembourg Sicav structure than in
UK Oeics. Almost all our new funds are
appearing in Sicav form rather than Oeic.”
The offshore Ucits strategy is a popular
means of entering Asia for fund managers,
though it comes with limitations in certain
markets where an onshore presence or joint
venture is necessary to penetrate deeper into
large asset pools like China.
Lowndes says: “In Japan, for example, we
could not sell a Ucits fund to the retail market
because you have to have a local fund domicile
and some fund management presence. But in
Taiwan, Hong Kong and Singapore, Sicavs are
sold on the open market. There are local
regulations and service requirements but
nevertheless the market allows you to sell non-
domiciled funds.”
Lowndes says Threadneedle will not establish
a big domestic operation in Japan in the near
future but is entering into relationships and
partnerships, such as with broker Nomura, and
with Tokio Marine, which promotes
24-25 threadneedleASPTSnf:Layout 1 28/5/10
Threadneedle’s global equities expertise in the
institutional market. However, options remain
open, he says, about the future business model.
Threadneedle is also looking for distribution
agreements around the region.
“There is substantial investment by local and
international banks in providing fund selection
advice and discretionary advice for their clients.
We’ve seen a fundamental investment in the
skills and the quality of their infrastructure by
distributors in Asia, both insurance companies
and banks.”
The purchase of the Standard Chartered
Bank’s Sicav also comes with a distribution
agreement for Asia, which Lowndes sees as
being invaluable.
“The Standard Chartered agreement was a
winner for us. The bank had weathered 2008
very well and was exposed to emerging markets.
The opportunity to work with them to distribute
funds was tremendously important.
14:07 Page 25
‘Our approach to Asia is
to not try to do everything
everywhere and to put
people on the ground in
all markets. We look more
for strategic relationships
in particular markets’
“They are strong in Taiwan, Hong Kong and
Korea which are all markets that we are
interested in. It gives us an opportunity to grow
with their business and we can also help them to
meet their needs.”
Korea is opening up its funds industry, says
Lowndes. Ucits are permitted through feeder
structures, although there are some local
requirements.
He says Singapore and Hong Kong are
main markets for the early stages of
Threadneedle’s Asian ambitions, as well as
Japan, Korea and Taiwan.
But what about mainland China?
“There are offshore opportunities in China
through the QDII project, but that would
require a local presence. However, an offshore
house can have a relationship with a QDII
provider and remain offshore,” says Lowndes.
He adds: “We are looking at both routes.”
Does this mean that a joint venture, the main
route to the Chinese market, is possible?
“We are looking at the joint venture model but
we haven’t decided that we are definitely doing
it. The Asian business is still at a fairly early
stage. Also, there are signs that the Chinese
regulatory landscape is changing, with insurance
companies starting to open up and this may
bring more opportunties.”
He continues: “Our approach to Asia is to not
try to do everything everywhere and to put
people on the ground in all markets. We look
more for strategic relationships with distributors
and key deals in particular markets.”
The key deal so far, that with Standard
Chartered, offered Threadneedle a platform of
35 funds. But this was not a straightforward
integration and it gave a team of consultants,
formerly at the management consultancy of
Morse in London, a major role under their new
employer, Navigant Consulting.
For Threadneedle, used to dealing in Oeics,
the consultants brought Sicav expertise.
“The key strength of Navigant’s contribution
was that they understood everything we needed
to do,” says Lowndes. “Sicav structures are very
different to Oeics. For a start, the fund boards in
a Sicav are much more formal.
“There were five funds that were gated or
suspended. The platform was mainly a multi-
manager platform. Quite a lot of funds were
sub-optimal in size so we had to restrict and
rebuild the franchise around the suspended and
gated funds and rationalise the sub advisers.”
Jim Connor, of Navigant’s investment
management business in London, says: “We
have knowledge of Luxembourg and of the
operating requirements of running a Sicav. In
M&A-type engagements such as this, our role
centres on pre-deal due diligence and post-
deal benefits.”
Lowndes adds: “When we came to look at
Sicav integration, it was clear it would not be a
small job. It would touch almost all of our
organisation. It was no different to integrating a
mid-scale asset manager in many respects, but
there were less people involved, so we had to
supplement our internal expertise.”
Corporate pensions
Threadneedle will target Asian institutions as
well as individuals through platforms and banks,
again with the tool of Ucits funds.
“We will market Ucits III funds as much to
potential institutional clients as we would to the
retail segment.”
But he notes that institutional markets are as
different across Asia as retail fund systems are.
“There is not a substantial corporate
pension market in many markets in Asia.
There are sovereign wealth funds or some
forms of government-controlled funds, but
there is not a big depth of corporate
pensions, except in Japan.
“The good thing is that the pools of available
institutional assets are relatively concentrated,
which means you can have a relatively efficient
institutional distribution model operating across
the region rather than market by market.”
Efficiencies are also a major appeal of the
Sicav/Ucits model, for Lowndes.
Lowndes says that Threadneedle is to launch a
US equities fund with hedge fund characteristics
under Ucits III rules through the Sicav.
The firm is also preparing a commodity
fund that will gain index exposure through
swaps. Exposure will be to hard and soft
commodities and the fund is differentiated by
not investing in commodity-based equities
like competing products. fe
25
26-29 CEO PanelASPTS:Layout 1 28/5/10 16:47
EXECUTIVE PANEL
‘Asset managers should put
clients’ interests first’
Top asset management executives discuss lessons learnt from the crisis and the
need to foster a longer-term investment mentality across the Asian region
PARTICIPANTS
Todd Ruppert, president and CEO, T.
Rowe Price Global Investment Services
Massimo Tosato, executive vice-
chairman, Schroders
Stewart Edgar, CEO, Asia Pacific, BNP
Paribas Investment Partners
Sundeep Sikka, CEO, Reliance Capital
Asset Management
Funds Europe: Should Asian private banks
and institutions be more selective about the
robustness and integrity of their potential
fund management partners after the
financial crisis? What criteria should they
use when buying funds?
Todd Ruppert, T. Rowe Price: Distributors
should always remain fastidious in their fund
selection process, irrespective of the economic
climate, and selection should always be based
upon a multitude of factors. Attributes such as
organisational, financial and professional
stability, tenure of investment professionals,
durability of the investment process, robustness
and independence of fundamental research,
quality of risk controls, consistency, etc, are very
important to scrutinise in the selection process.
Beyond this, distributors should evaluate the
quality of client service, the clarity of
communications and the degree of
transparency. Above all, distributors should
determine if the asset manager consistently
exudes trust and unwavering integrity. Asset
managers are supposed to be fiduciaries, they
are guardians of a trust and should always put
clients’ interests first. One lesson the financial
crisis taught us is that not all organisations –
distributors included – acted with unwavering
integrity. Perhaps more focus on this will ensue
post crisis.
Massimo Tosato, Schroders: I do not
believe that there are any fundamental
26
Page 26
Todd Ruppert, T. Rowe Price
‘Reputation of the
management, size of the
fund house itself, size of
the individual funds
and the risk-
management procedures
at the firm assume a lot
more significance than
just performance’
differences in the due diligence standards
followed in Asia versus Europe or the US. We
have noticed much improved depth in the due
diligence of our global intermediary clients
over the last 18 months, and we welcome this
because depth of understanding improves the
longevity of the relationship.
Stewart Edgar, BNP Paribas: We have
indeed seen clients become more selective in this
regard. There has been a much greater focus by
the end customer on the financial strength and
quality of the fund management firms they are
prepared to trust with their investments. This
relates to both the ability to withstand shocks
connected to the general financial crisis and the
commitment to provide and support robust
solutions over the long term.
While the most important criterion for Asian
private banks and institutions in selecting fund
management partners remains a thorough
understanding of the manager’s investment
process and results, great consideration must also
be placed on the manager’s ability to create and
support appropriate products over the long term.
Furthermore, managers must also be capable
of demonstrating a sound compliance and risk
control system.
Sundeep Sikka, Reliance Capital: The
financial crisis had valuable lessons for all
stakeholders in the financial industry including
investors and advisors of investments. Starting
from the time of the crisis, continuing to the
present and perhaps for a very long time into the
future, the major criteria that were or are being
used when buying funds are the ability to pay
funds at a short notice – liquidity – and the
integrity of the fund management firms to
honour the commitment of meeting such
redemptions beyond just the legal constituents
of the fund. Therefore, reputation of the
management, size of the fund house itself, size
of the individual funds and the risk-
management procedures at the firm assume a
lot more significance than just performance.
Funds Europe: What are the after effects of
the financial crisis on the structure of the
distribution business in Asia? Are new
channels likely to rise up and challenge
private and retail banks? Also, are local
fund managers likely to compete better with
European and North American managers?
26-29 CEO PanelASPTS:Layout 1 28/5/10 16:47
Ruppert: Thus far, not much. Banks continue
to dominate distribution in most, but not all,
Asian markets. New channels, such as
investment advisors, as well as online and
other technology-enabled approaches, are
likely to gain traction in some countries as
financial literacy and fund investing further
develop. This will have an impact, at the
margin, on distribution dynamics.
So far, having a strong distribution network
has been key to accessing end investors in large
and diverse markets. In China and Japan, for
example, banks play a dominant role in
distribution, whereas in India and Australia
the independent financial advisor network is
omnipresent. The elimination of front-end
sales charges by the Indian regulator last
August is having an impact on the structure of
distribution. However, structure aside, end-
investors must have trust and confidence in the
products in which they invest, regardless of
what distribution channel serves them.
As retail investors become more financially
aware, they should demand more information,
more transparency and lower fees. They may
not be as eager to blindly purchase the latest
hot, trendy thematic product. It is in the asset
management industry’s best interests to
encourage financial literacy and assist with its
promotion. If investors are able to make
investment decisions appropriate for their
particular circumstances, this will lead to more
satisfied and long-term clients.
Local Asian asset managers will increasingly
compete with European and North American
managers, both in Asia and the West. Indeed,
Asian investment managers are already
appearing on ranking tables in the West as
they expand into Europe and the US. Of
course, domestic products will remain a
significant portion of Asian investors’ asset
allocations, and many Asian managers have
strong local and regional investment
capabilities. Many have aspirations to become
true global competitors in multiple asset
classes; no doubt, some will succeed.
Tosato: Although the financial crisis has put
most pressure on the consumer banks
especially in terms of them making
adjustments to their client profiling as well as
sales practises, they are and will remain the
dominant sales channel in the region. Having
said that, insurance companies are
aggressively retooling their agency force in
providing more financial products than just
insurance, while investment-linked products
are continuing their growth within the
insurance offering.
Page 27
Massimo Tosato,
Schroders
‘It is in the asset
management industry’s
best interests to
encourage financial
literacy and assist with
its promotion’
Private banks are growing fast again and are
becoming of greater importance in the sale of
third-party funds. The biggest challenge is going
to be the transition to a fee-based sales model
from a commission-driven one.
With the notable exception of Mirae, the
Asian competitors are still mainly local-to-local
in each market, and we have not yet seen the
emergence of a broad-based regional
champion.
Edgar: The main effect of the crisis on the
distribution business in Asia is that regulators
have become more cautious, largely due to
losses incurred by retail clients from structured
products that were missold (such as Lehman
minibonds). A side effect of this has been a
relative switch in some countries from funds to
insurance-linked products, where the regulatory
situation has seen less change.
It is unlikely, however, that we will see new
channels challenging private and retail banks
who have the size and expertise to remain
dominant in this area.
Aside from a few notable global players based
in Asia, there is little sign yet of a significant rise
in the competitive positioning of local managers
versus their European and US counterparts. To
be attractive long-term partners, investment
managers need to provide a wide range of
solutions through the constant innovation of
their global skills and expertise base. This
established skill base provides a strong
competitive advantage which will favour the
European and US players over time. Local
managers, while learning fast, are generally
strong in their home market, but lack, for the
moment, the depth of international exposure
required. As a result, local private banks and
institutions are still eager to partner with
European and US mutual fund managers and
to leverage their capabilities.
Sikka: Large institutions are not automatically
considered the Houses of Wisdom anymore
and are increasingly facing the question of
credibility. Those who can win the trust of their
customers by showcasing their consistent track
record and by providing differentiated, value-
added services are likely to be successful.
Consequently, the composition of the structure
of the distribution business is changing, from
being largely institution dominated to a good
combination of large banks, boutique firms and
independent financial advisors.
Fund managers based onshore having a better
understanding of the on-the-ground realities
and local nuances are likely to be more
competent than their counterparts operating
offshore.
Funds Europe: How are Asian fund flows
changing? And are they changing
appropriately to benefit from emerging
market growth and the threat of inflation?
Ruppert: As local Asian fund industries further
develop, we expect to witness more global
diversification, as well as less infatuation with
hyped, thematic products with a short-term
bias. That said there will always exist a strong
bias for domestic and Asian regional investing,
just as there are similar domestic and regional
biases in European countries and the US.
However, the local/regional biases are probably
stronger in Asia, given issues such as regulatory
restrictions on foreign investing in some
countries and the historically strong returns of
Asian emerging markets.
Of course, if asset allocation products, similar
to the lifecycle funds in the US or the balanced
products in Europe, gain traction, we may see a
shift away from the short-term flows into hot-
27
26-29 CEO PanelASPTS:Layout 1 28/5/10 16:47
EXECUTIVE PANEL
themed products we currently witness. If this is
the case, then Asian investors will gain
diversification benefits and a more long-term
focus. However, we shouldn’t expect solutions to
completely mimic what has worked in North
America or Europe. Fund providers will need to
adapt solutions to meet the needs and
expectations of a growing Asian investor class.
Tosato: Over the first 18 months, Asia has
remained subdued with respect to American
and European investors. The major changes
that have taken place in Asia fund flows are a
shift from a very dominant market share for
equity funds to a large share for fixed income
funds. Also, we have seen structured products
virtually disappear from the mass retail market,
the exception being private banks who continue
to provide these to their clients. Asian and
emerging markets securities tend to dominate
demand and are seen as domestic asset classes.
Inflation as a theme for investment products is
only slowly becoming of greater importance.
The US dollar is still considered the preferred
international diversified currency of excellence.
Edgar: Asian fund flows have not really
changed much. Asian investors have always
had a home bias, which is prevalent in most
regions. Because of their home bias, they
naturally have emerging market exposure and
they have been among the first investors to
return to emerging markets.
Neither has there been a major change in
positioning in response to the threat of inflation,
although Asian investors typically have a greater
exposure to equities than their European and
American counterparts. Equities have
historically had a relatively high correlation with
inflation so this helps to protect their portfolios
from the effects of inflation.
Sikka: Fund flow data suggest that allocation
of funds is shifting from developed markets to
emerging markets. Global benchmarks are
being revised in a manner where the weighting
of emerging market assets is increasing. This, in
turn, is resulting in incremental capital inflows
to emerging market assets, especially equities.
Going forward, given that incremental global
GDP growth will come from emerging markets,
especially emerging Asia, we see this benevolent
and positive trend of increased allocation
towards emerging Asian markets to continue.
Allocation from domestic investors is also
shifting from the traditional investment
products to asset classes such as equities through
28
Page 28
term approach to investing for Asian investors.
We believe it is in a client’s and, admittedly,
also in an asset manager’s, best interest if they
invest for the long term rather than chase the
latest hot product.
However, the pervasive incentive structures
misalign the interests of distributors and
investors. A shift to fee-based advice is
beginning to play out in some markets, which
should be beneficial long term.
That said, it is putative that Asian investors
are notoriously biased towards short-term
investing. Therefore it is important that wealth
advisors understand this but act properly as
fiduciaries, ensuring that the client’s best long-
term interests are at the core of any decisions.
Enhanced financial literacy should be on
their agendas and the focus needs to shift
towards core strategic educational campaigns,
which can enable relationships that are more
Sundeep Sikka,
productive over time. Short-term trading will
Reliance Capital not disappear any time soon, but selected
strategies, markets and distribution channels
are slowly becoming more promising.
Overall, fund providers have to use a
‘Fund providers have to fundamentally different strategy in Asia
use a fundamentally compared to other regions of the world,
recognising that currently Asian investors have
different strategy in a tendency to focus on the short-term goals
Asia compared to other rather than a long glide path to retirement.
regions of the world, Tosato: Private banks and wealth advisors
recognising that unfortunately have not shown a fundamental
difference in behavioural patterns as far as the
currently Asian investors buying and selling of mutual funds goes.
have a tendency to focus Hence, speculation, rather than saving,
continues to be the mantra in Asia across the
on the short-term goals board.
rather than a long glide There is a strong component of the fashion
business: What is the new story of the year?
path to retirement’ With institutions there is a far greater emphasis
on strategic asset allocation using funds rather
than segregated mandates or specialist
increased investments in mutual funds, products for small- to medium-sized
insurance and secondary market exposures in investments up to $100m.
order to beat the threat of inflation and gain
from the growth of emerging markets. Edgar: The situation is the same for private
banking clients in Asia. In general their
Funds Europe: Asian retail investors, portfolios have a higher turnover than those in
particularly in China, are known to trade other regions. However, Asian private banks,
funds. What is the situation with private together with the asset management industry,
bank wealth advisors? And do funds have a are trying to promote longer-term strategies,
role in a buy-and-hold strategy for Asian and mutual funds in general are seen as an
institutions? excellent tool to achieve this. Still, percentages
invested in mutual funds at private banks in the
Ruppert: Wealth advisors can certainly play region are low on average, so asset managers
an important role in developing a more long- have a lot of scope for growth.
26-29 CEO PanelASPTS:Layout 1 28/5/10 16:47
Sikka: Retail investors generally are more
sentimental about their investments than the
overall market and tend to trade more
frequently than what may be required. Even in
India, although as a fund house we keep
advocating the benefits of staying invested for a
longer period of time, investors tend to churn
their portfolios quite regularly. We have even
devised a unique product to explicitly
encourage long-term investments.
I am confident, as markets mature, that
investors will start realising the difficulty of
timing the market, the impact of cost on the
eventual returns of the fund and increasingly
move towards staying invested for the longer
term. The same will be the case with private
bank wealth advisors.
Funds Europe: Is Asian social and economic
policy sufficiently supportive of a long-term
savings industry?
Ruppert: Long-term focused markets have
been created by linking investing to retirement
in places like the US where defined contribution
introduced the average investor to mutual funds,
and in Australia where the successful
Superannuation plans include a 9%
compulsory contribution.
We do hope to see a shift towards a more long-
term focus within the savings industry in Asia,
but it is different factors that are likely to
motivate this shift compared to the US and
other more mature markets. Countries like
India and China already have very high
personal savings rates, unlike many Western
countries where tax incentives are used to
motivate savings rates. However, it is a savings,
and not yet an investing culture that currently
exists in Asia. This is evidenced by the
household penetration of mutual funds, which
is only around 5% in many Asian countries
similar to the rates seen in the US in the 1980s.
After several decades of fund industry
development, 43% of households in the US
now invest in funds.
Unfortunately, Asia is lacking a strong regional
industry association to advocate regulation and
policy that can help to support long-term
savings, compared with Efama in Europe and
ICI in the US, who are both cohesive and
instrumental voices that support this theme.
Encouragingly, the factor that may have a
significant impact on Asia’s fund industry is
the expected dramatic growth of the middle
class. India’s middle class is expected to rise to
over 500 million people by 2025, (more than
Page 29
important that the asset management industry
recognises and prepares for this. Only this way
can the industry meet the investment needs of
these future clients.
Tosato: A lot more needs to be done in terms
of education and understanding of financial
planning in Asia. A short-term outlook
dominates over long-term saving. With savings
rates in Asia at very high levels indeed, mutual
funds still have a very low penetration rate.
During the financial crisis the small gains in
penetration rates of funds have largely been
given up due to investors selling out. To
enhance a true savings mentality through funds,
we need a longer-term outlook, an improved
pension fund (DC) market and a change in
product offerings.
As the average wealth of Asia continues to
grow, the population starts to age, then the
Stewart Edgar, creation of a long-term savings market for
BNP Paribas
retirement and post retirement becomes
essential. The introduction of tax facilitations
in exchange for longer-term commitments
and of lifestyle funds with dynamic asset
‘I am confident, as allocation strategies would be major drivers
markets mature, that for the development of the third pillar in
personal savings.
investors will start
realising the difficulty Edgar: In general, Asian government policy is
very supportive in developing a long-term
of timing the market, the savings industry. Examples such as the MPF in
impact of cost on the Hong Kong to the Enterprise Annuity system in
the PRC show an admirable focus on long-term
eventual returns of the funded vehicles for the general population.
fund and increasingly Furthermore, the sovereign wealth funds in the
region are some of the most sophisticated and
move towards staying closely watched investors in the world.
invested for the
Sikka: Taking a leaf from the crisis that
longer term’ occurred in many Western countries, Asian
governments acknowledge the need to
encourage and channel household savings for
the longer term. There are explicit tax
benefits offered as an incentive to inculcate
the entire population of the EU today). This is long-term savings.
coupled with the demographic pressures of an There may also be implicit benefits, or should
ageing population in many Asian countries I say imperative threats, of long-term savings
such as Japan and China. Therefore, helping the cause of meeting healthcare
individual retirement savings will be necessary requirements and retirement benefits in the
due to the lack of sufficient first and second absence of a developed social security system.
pillar pension plans. The long-term government-backed returns are
While high-net-worth investors have been the also fairly attractive to help the cause. Returns
initial focus of the investment industry growth from what are deemed long-term investment
across Asia so far, the swelling of the middle asset classes such as equities are also attractive
class population is likely to bring the new fund enough to bring about a culture of saving for
investors of the future into Asia. We believe it is the longer term. fe
29
30-31 sponsoredprofASPTSnf:Layout 1 28/5/10 14:10 Page 30

SPONSORED PROFILE

Wise mover
T. Rowe Price’s approach to entering the competitive Asian
market has been measured and considered. The results are
now paying off, Todd Ruppert tells Funds Europe

As the shift of power moves from East to West,
penetrating the Asian markets is becoming
more important for asset managers looking to
grow their business. Everyone wants a piece of
the Asian pie, but not everyone can get it.
Todd Ruppert, president and chief executive
of T. Rowe Price Global Investment Services
Limited, says T. Rowe Price has been diligent
and judicious in its expansion into Asian
markets and is increasingly better positioned
for the developments expected within this part
of the world.
The firm’s Asian distribution footprint has
been growing since the firm’s joint venture
with Sumitomo Mitsui Banking Corporation
and Daiwa Securities in 1999. That successful
joint venture, Daiwa SB Investments, is the
most longstanding asset management joint
venture in Japan. T. Rowe Price serves as the
There are certain Asian countries and/or
distribution channels that T. Rowe Price has
‘It’s extremely important specifically decided not to enter. Ruppert
gives the Singapore and Hong Kong retail
to continually evaluate. markets as examples: “In a relative sense,
There may be they are both small and most certainly are
very crowded with entrenched competitors.
developments that We don’t see justifiable rationale for
necessitate further due entering them – at least in the current
context. We do, however, work with
diligence and a possible institutional investors.” He doesn’t rule out
resulting change the possibility that this situation may change
going forward. “It’s extremely important to
of focus’ continually evaluate. There may be
developments that necessitate further
due diligence and a possible resulting change
of focus.”
Flemming Madsen

non-Japanese sub-adviser for products

distributed through SMBC, Daiwa Securities
and others. In 2004, T. Rowe Price
commenced its activities in Australia and New
Zealand where it works with both institutional
investors and intermediaries. In 2006, T. Rowe
Price was among the first managers hired by
China’s National Social Security Fund, and in
2007 was appointed global investment advisor
for China’s largest asset manager, China Asset
Management. This year, T. Rowe Price
completed its US$142.4m (€116.2m)
acquisition of a 26% stake in India’s oldest and
fourth largest asset manager, UTI Asset
Management. It also partnered with Marbo
Asset Management Group in Taiwan for its
initial launch in the Taiwanese market. Marbo
serves as T. Rowe Price’s master agent.
This push into Asia demonstrates the firm’s
disciplined approach to growth and that it
has done its homework: “We’ve always been
very thoughtful and disciplined in our
expansion strategy. There is a high level of
conviction behind every move we make. To
date, I’d say our decisions have proven to be
rather sagacious.”

30
30-31 sponsoredprofASPTSnf:Layout 1 28/5/10 14:10 Page 31

But, for the moment, T. Rowe Price is

Todd Ruppert
content with its Asian presence and Ruppert
believes the firm can take advantage of the
progress in the markets it participates in. “As
retail and institutional markets develop
and/or expand, investors increasingly allocate
assets outside their home markets. We’re well
positioned to benefit from this development
and can leverage off what we have already
built in these regions, rather than blindly
focusing on incremental geographical
expansion for growth.” he says. “In India we
also benefit from the growth of retail
investments in Indian securities by virtue of
our equity ownership.

Strategic planning
“We’re not about growing for growth’s sake.
When considering a new opportunity, we look
at multiple factors and the impact of
expansion on the entire organisation. Just as
we’re thoughtful about what companies we
invest in for our valued clients, we apply the
same philosophy when considering entering
new countries and/or distribution channels,”
says Ruppert.
This sensible, prudent approach appears to
be paying off as T. Rowe Price is garnering
success with both retail and institutional
investors in its Asian markets of choice.
The decision to move into Taiwan, Ruppert
explains, was made when a number of factors
changed, turning the country into a more
attractive opportunity for T. Rowe Price. “We
actually began evaluating the Taiwanese
market back in 2004, but it wasn't appealing
for us until now,” he says.
Flemming Madsen, director and head of the
Asia Pacific region for T. Rowe Price Global
Investment Services, says: “The 2004/2005
bond fund scandal was a serious setback for
the Taiwanese mutual fund market plus
demand for global portfolios was weak. But
over the last couple of years the market has
stabilised and investors have been allocating
more towards global markets and therefore
there is a much better fit with what we at T.
Rowe Price can offer them. The same is true
for the large government pension funds in
Taiwan, where large international
outsourcing programs are moving forward.”
The equity investment in UTI Asset
Management is T. Rowe Price’s other most
significant recent move into Asia.
Madsen says: “The Indian economy is
attractive and the demographics are quite
favourable with a relatively young population
‘We actually began
evaluating the
Taiwanese market back
in 2004, but it wasn't
appealing for us
until now’
and a rapidly developing middle class. Also,
the savings rate is running at 35-40% so the
macro considerations line up very well for
the continued fast expansion of the mutual
fund market.”
Mutually beneficial relationship
Ruppert explains why the firm decided to buy
into a well-established company like UTI,
rather than to build from scratch alone.
“By our very nature, T. Rowe Price is not an
acquisitive firm, we have grown organically.
That said, we acknowledge the fact that in
certain situations it’s economically prudent to
consider working with a partner,” he explains,
“In India, given the wide distribution
footprint required to be successful in the retail
market long term, combined with the
idiosyncrasies of retail distribution and the
embryonic nature of the institutional market,
it made absolutely zero economic sense for us
to enter India on our own. Without the
opportunity to work with a well-established,
highly regarded, capable, trustworthy, market
leading firm, we would not enter the market.”
Ruppert says the relationship with UTI is
developing very well and is fulfilling its goal of
being mutually beneficial. “UTI is gaining
market share and continually improving.
We're learning from them, providing them a
lot of input, and the personal relationships are
exceptional. I’m pleased to say we have had
none of the serious growing pains usually
associated with joint ventures,” he says. He
attributes this to the effort put into the
research before the firm embarked on the
agreement. “T. Rowe Price is extremely
fastidious. We do our homework – lots of
homework. We worked with UTI for over a
year, getting to know the people and how we
would interact. Likewise, UTI did their
homework. This was not a shotgun marriage;
it was very well thought through well before
we made the investment.” fe

31
32-39 roundtableASPTSnf:Layout 1 28/5/10
ROUNDTABLE
Tactical discussion
Global asset servicers based in Asia discuss what shaped the present Asian funds
industry and what they can do to build a stronger framework for the future
PARTICIPANTS
Nick Fitzpatrick: editor, Funds Europe
Andre Durand: managing director,
SGSS Hong Kong
Lawrence Bailey: senior vice president
and Asia-Pacific business executive,
JPMorgan Worldwide Securities Services
Ritesh Singh: head of the regulatory
and industry affairs for Asia-Pacific fund
services, HSBC Securities Services
Scott McLaren: head of Asia Pacific
sales and distribution, RBC Dexia
Barnaby Nelson: head of business
development Asia, BNP Paribas
Securities Services
Michael Chan: CEO, Asia Pacific,
BNY Mellon Asset Servicing
Chris Ryan: senior advisor for investor
services, Citi Global Transaction Services
Funds Europe: Events like the Madoff
crisis brought an increased focus on
protection. To what extent are Asian
investors concerned about investor
protection and how do asset servicers play
a role in this? How does regulation
support investors?
Michael Chan, BNY Mellon: Fo r
global custodians operating in Asia, the
Madoff crisis did not have much impact, if
any. However, the regulators are just clarifying
this with new regulation. You can certainly see
more details included about the need for
qualified custodians, while investment
managers are not being allowed to hold client
assets, etc. But there was nothing missing, it
was more of a clarification of roles and
responsibilities.
Barnaby Nelson, BNP Paribas:
Following the Madoff incident, broad asset
32
16:29 Page 32
protection in Asia went from somewhere in
the mid-tier of considerations to being the
number one priority, much like it has done in
the rest of the world. This has prompted some
concerns. But I think we’re coming to the end
of the phase when everything was a focused
discussion about the maximum amount of
protection that you could possibly get. There
was an 18-month window when it was all
about security and asset segregation. Clients
wanted to know exactly how to segregate and
how to protect all assets, at all costs. Now the
dust has just started to settle and we’re coming
to the point where these concerns are still
important, but risk, quality of service and
everything else is starting to come back up to
create a more level playing field.
Lawrence Bailey, JPMorgan: Now
that Asian investors are getting more
interested in alternative investments for both
diversification and greater yield, they are
asking many questions around the
responsibilities of the custodian. Things like
private equity funds, derivatives, and other
alternative asset classes changed the
landscape in Asia, even before Madoff.
Ritesh Singh, HSBC: The events
over the last 18 months have definitely
resulted in a significantly increased focus on
investor protection. Following events such as
Madoff, demands on due diligence on asset
servicers by investors have gone up
significantly with greater focus on
transparency, disclosure, compliance
monitoring, etc. Even basic activities, such as
safekeeping and segregation of assets, which
were earlier a given, are now being closely
monitored. This means that service providers
like HSBC are constantly under scrutiny from
the investors. Independence of valuations is
another topic that investors have been
focusing on a lot more. Valuations have been
at the forefront of discussions – questions
around how you value illiquid instruments
and over the counters, for example.
Andre Durand, SGSS: It depends
which investors we are talking about. For
retail investors, things would not have
changed much, but institutional investors
really need transparency and independent
valuations, as Ritesh says. Asset servicing
includes all the independent valuation on
OTC products, for instance, and there is a
need for this here in Asia, like anywhere else.
Nelson: It comes down to two things, really.
One is feeling in control, and then the other
is demonstrating that control. On the one
hand you’ve got control over the
fundamental processes, the plumbing if you
like, including valuations, account
structuring, line of responsibility, etc. On the
other hand demonstrating that control is
probably just the same as anywhere else in
the world; the scrutiny from the Mas
[Monetary Authority of Singapore] or SFC
[Securities and Futures Commission], for
example. Investment committees have to
show that they are really managing their risks
accurately. This comes down to all types of
reporting, compliance offerings, etc.
Scott McLaren, RBC Dexia: The
question talked about Asian investors
themselves being concerned about investor
protection and I would say retail investors are
not really concerned. It’s only when things go
wrong that people go back and read the fine
print. In a market where there’s opportunity
to make money, the retail investor still doesn’t
care much about investor protection.
However, there are a number of areas where
the regulators are taking up the issue,
especially in Hong Kong. There’s more
scrutiny on product approvals, so as a result,
32-39 roundtableASPTSnf:Layout 1 28/5/10 16:31 Page 33

Andre Durand, SGSS Chris Ryan, Citi Ritesh Singh, HSBC Barnaby Nelson, BNP Michael Chan, BNY Laurence Bailey, JP Scott McLaren, RBC
Paribas Mellon Morgan Dexia

in the last year, a lot less products were
approved for sale. For example, we have one
client who’s been waiting nearly 18 months
for a product approval.
In areas like MPF there is a lot of concern
around product disclosures, which are being
referred to as health warnings. Even naming
conventions are changing. A year ago,
certain products with the tag ‘guaranteed’
weren’t always fully guaranteed. From a fund
manager perspective, the Mas recently came
out with a directive on the alternative side,
proposing regulation for the fund managers.
They are now looking for capital
requirements and licensing of hedge fund
managers to protect the investor. So what
the regulators are doing to protect the
investor is significant.
Chris Ryan, Citi: We’ve actually had some
shockwaves of our own in Asia, which had
nothing to do with Madoff. This part of the
industry dodged a bullet when it came to
structured products. In the early 2000s, most
structured products sold in Hong Kong and
Singapore were sold inside funds, in which
case the region would have been impacted.
Now they’ve been sold directly from the
issuer, through an intermediary to the
customer, and we’ve all seen what’s happened
there. The other big issue relates to
alternative investments, particularly how
‘In areas like MPF there
is a lot of concern
around product
disclosures, which are
being referred to as
health warnings’
hedge funds got through this crisis. One of
the major consultants here has said that
somewhere between 50% and 75% of all
hedge funds disappeared over the last two
years. I don’t know whether that’s an asset-
weighted percentage or whether it’s just a
nominal percentage, but either way, you saw
completely different reactions from the hedge
funds. Some provided liquidity where they
could, others resorted to closures and side
pockets and all sorts of other strategies to try
and avoid having to pay the money out and
to continue collecting fees. That activity
looked rather chaotic. If you talk to private
bankers, they will tell you that there has to be
more regulation around this kind of activity
because various investors were treated
differently. We also had asset accumulators
here in Hong Kong and other forms of assets
that we currently don’t hold in funds. Given
things like Ucits III, some of those assets
could be held in funds in the future and we
have to be aware of the impact this will have
going forward. The argument runs a lot
deeper than who has control of the assets. It’s
about the role our part of the industry plays
in the governance as well as the behaviour of
those managing the assets.

Bailey: The redemptions being halted and

the recall, or lack thereof, of assets in
securities lending reverberated around the
globe and clients were trying to work out
their options and whether the flexibility and
liquidity of their investments, as well as the
security of their assets, were as they
understood them to be. It brought up the
whole question of segregated accounts and
made people realise that in some cases, they
can’t recall assets. After all, when asset values
and returns are going up it’s great, but when
things are going down and you can’t get out
it’s a big issue, both on the retail and on the
wholesale side.

33
32-39 roundtableASPTSnf:Layout 1 28/5/10
ROUNDTABLE
Chan: I agree with Scott, if there’s money
to be made, the investors are not too
concerned. We talked about Hong Kong and
Singapore where they probably have the
most stringent and detailed regulations by
far. But in these same countries, a couple of
large banks in Hong Kong and a large
insurance company in Singapore partially
reimbursed their investors by buying back
minibond products. So, the concern is there,
but the investors also have this paternalistic
view of the regulators, thinking that they’re
going to be covered either way. Of course
you can strongly appreciate that every
country is a little different.
Nelson: The acid test is going to be the
coming year, because it’s starting all over
again. You’re already starting to see more
structured products coming out with
different names. They are different structures
this time, but the big question everyone is
asking today is whether the mistakes will be
repeated. We don’t have a crystal ball, but I
believe the market has learnt a lesson.
Funds Europe: How were wealth
management platforms affected by the
fall of structured products?
Singh: The minibond issue put a lot of
pressure on the regulators to act. This
resulted in a series of measures being taken
to tighten the sales and distribution process.
This also led to, as Scott mentioned, a
significant slowdown in product approvals,
especially those that are not vanilla in
nature. The demand for sophisticated
products tapered off anyway in this kind of
an environment.
Ryan: Recently, they’ve been focusing on
suitability for these sorts of investments, but I
still don’t think that there is any consistency
across Asia, in terms of how this issue is
going to be dealt with. It’s not easy, and
anything you do to suitability runs the risk of
creating other problems. In essence, the
industry could dramatically increase the cost
of selling. For example, you could go to a
bank to buy a structured product and it
would take 45 minutes to an hour to go
through all the risk management
documentation. It wouldn’t matter whether
you’re investing ten thousand or ten million;
you would still have to go through the same
process. And you would have to do the same
34
16:31 Page 34
‘The big question is
whether the mistakes
will be repeated. We
don’t have a crystal ball,
but I believe the market
has learnt a lesson’
thing if you wanted to buy a fund, so it’s
actually bad for the industry.
McLaren: Suitability is all about
understanding the risk profile. Education,
particularly for Asian investors, is a long way
off from where it is in a more developed
market, like the US. I recently heard one
view that education should be entrusted to
the sales channels, because they’re the ones
closest to the investors. There is a fairly
obvious conflict of interest there – handing
somebody a 30-page document on all the
reasons why they shouldn’t buy a product
and then trying to get them to buy it. So
education is the long-term solution to this,
but there’s currently no independent entity
or industry body that is taking up this role in
the market.
Funds Europe: Under Ucits, the
safekeeping rules in Europe are stricter
than the safekeeping laws in some
individual countries in Asia. Ucits funds
are already very popular here, but have
they benefited further as a product type
purely on the back of the operational
aspects of safekeeping?
McLaren: The three primary
countries in Asia – Singapore, Hong Kong
and Taiwan – all have a fairly evolved
acceptance procedure of Ucits funds,
irrespective of the European domicile. Hong
Kong is probably the most advanced. About
70% of Hong Kong’s SFC-authorised funds
are Luxembourg-domiciled and 20% are
Irish funds. Ucits is the main cross-border
vehicle that has had success because it has
been around since 1988 in Luxembourg and
the approvals procedure is a fairly well-
trodden path. I don’t think the man on the
street in Hong Kong buying a product from a
fund manager has really any idea what
domicile of fund he’s buying at the end of
the day.
Nelson: People tend to believe that products
that have been in existence for a longer period
of time are usually a safer vehicle. Although it
definitely carries significant benefits in terms
of transparency and due diligence, it’s not a
proven link today and yet people tend to make

that association.
32-39 roundtableASPTSnf:Layout 1 28/5/10
Ryan: It’s like a watermark for the
product but people don’t even remember
what the watermark stands for. It’s kind of
safe because it’s been around for a long time,
but there are concerns in terms of the new
regulations, the complexity and some of the
reporting issues at a local level too. Some
ripples were felt in places like Taiwan, which
is one of the biggest, if not the biggest,
market in Asia for Ucits funds. One thinks
that the natural progression of expanding the
coverage of Ucits is going to be beneficial to
both the fund managers and to the investors.
On one hand, it creates more complexity in
terms of the documentation and the
reporting. On the other hand, a lot of the
things that Ucits III allows means the funds
can’t be registered because they are in conflict
with the local regulations. The fund
management industry in Asia needs to ask
itself, ‘how useful is Ucits?’ The further you
go, the less useful Ucits is going to be because
the local regulations haven’t caught up, and
probably won’t catch up for quite some time.
For example, you can’t sell private equity
funds to retail investors in Taiwan and you
can’t sell funds with high levels of derivatives
either.
McLaren: Chris has always been an
advocate of setting up a Ucits-type vehicle
equivalent in Asia, a sort of ‘Luxembourg of
the East’.
Bailey: There is also the downstream
challenge for Ucits. When investing in some
of the markets, you may think you have
protection, which you will have at the point of
entry into a fund, but can the sub-custodians
and the other agents support these
requirements? Even if it’s something that
technically you’re allowed to invest in, as you
get into more emerging markets and you can’t
have any restrictions on the liabilities for the
sub-custodians, this can become more of a
challenge. For example, in Russia you have to
guarantee the subs and brokers in a very
different way to how you would in other
countries normally. So there are downsides;
Ucits is not Nirvana, there are issues on both
sides.
Nelson: Globally, there is always a dilemma
between the regulators and investment
management. For regulators, it is a zero sum
game; they’re aiming for a 100% success
rate. They’ve got to protect everything and
16:32 Page 35
are not looking to introduce any kind of
unknown risks into the market. Inevitably,
there is concern that tightened market safety
may hold up innovation. This, of course, is
something worth further discussions.
Bailey: As an industry we come into our
own where we are seen as a group that
doesn’t have the biases of a fund manager or
an investment bank when questioning new
regulation. We come from a more practical
and pragmatic viewpoint. When Australia
issued the ban on short selling, it was about
to halt all trading in Australia because it
hadn’t been thought through from a practical
and execution prospective. It was the
custodian association, along with the fund
manager association, who said, ‘We
understand what you’re trying to do, but if
you actually implement it this way, nobody
can sell a single security.’ So this is where we
‘The further you go, the
less useful Ucits is going to
be because the local
regulations haven’t caught
up, and probably won’t
catch up for some time’
have to work harder as a group, to try and
keep that innovation going and to talk about
the practical side of things.
Singh: The regulatory response we have
seen over the last 18 months has not been
unexpected given the environment. Most
markets in the region have implemented
some kind of investor protection measures,
whether it is Hong Kong, Singapore, Korea,
India, China, Taiwan or Indonesia. You have
others, like Thailand and Malaysia, looking
at new measures as well. While having a tight
regulatory framework is obviously critical,
the question to also ask is at what cost? For
the past few years, regulators have also been
trying to push down costs for investors. We
can draw a parallel here with Europe where
there is a lot more hectic activity with the
AIFMD [Alternative Investment Fund
Managers Directive]. There was a study
done by Europe Economics which estimated
that the one-time compliance cost for the
entire non-Ucits sector could go up to
around €22bn and transaction costs go up by
10-15% to be able to comply with the new
measures that are being proposed under the
AIFMD. Therefore the challenge is to
balance investor protection with the
attendant cost because all these measures we
are talking about will bring about
incremental cost, which could ultimately hit
investors as well, though we are yet to see as
to who bears this cost.
35
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ROUNDTABLE
The other aspect is the balance between
product innovation and risk management.
That is another area where product
approvals have become slower and you have
to ask, how much should you curb innovation
to manage risk? At the end of the day, you
also need to look at the development of the
industry and how we move forward with new
products, though such products might not
necessarily be for the masses. The same
Europe Economics study also estimates that
reduced innovation in the AIFM sector could
result in a drop of 0.1% to 0.2% in annual
EU GDP growth rates though this will
naturally bring about reduced volatility,
especially during recession. Therefore, we do
need to balance it out.
Funds Europe: Your peers in Europe
are under a tremendous amount of cost
pressure and I’m sure it’s no different
here. Since it’s very difficult to put up
fees, is your only option to simply get more
business from your clients to make it pay?
Ryan: It’s a good point. We talked about
innovation, but the fact is that over the last
36
16:32 Page 36
seven years in Asia, what was once the fund
market is now spread between direct
securities, structured products, life insurance
products, funds, IPOs and a number of
investment vehicles. The fund sales in Hong
Kong, according to the Hong Kong
Investment Funds Association, came in at
HK$15bn [€1.57bn] net sales for 2009. This
sounds like a reasonable number, but there
are 50 managers here. In other words, that
total of HK$15bn is divided by 50 –
somebody’s clearly losing money.
The challenge that lies within this conflict
is between innovation, which makes
‘You need to consider
what is the pace of
innovation, whether the
market can absorb it and
whether it’s
counterproductive to the
economics of the industry’
understanding the products more difficult
and more expensive, and simplicity. I’m not
suggesting we should exclusively go back to
very simple products but there is a lingering
question of whether people buy more funds
if they’re offered very simple products that
they understand? I don’t know. But if the
industry wants to drive up fund volumes,
then maybe creating more complex products
is not the way to go. Increasing costs and
reducing volumes will produce a negative
spiral. A more complex product takes longer
to sell and costs more to sell, so the
distributor would obviously demand a higher
fee. In turn, this creates pressure all the way
back down to the end of the chain, which is
where we stand. You have to think about
these things rather than advocating
innovation for innovation’s sake. You need to
consider what is the pace of innovation,
whether the market can absorb it and
whether it’s counterproductive to the
economics of the industry. China and India
have both resisted making funds overly
complex because they know it will make
people buy less in the long run and that
they’ll have more difficulty selling those
funds. We can sometimes get caught up in an
intellectual argument about having very
sophisticated funds with lots of derivatives
and exotic alternative assets. This is fine if
the education of the investors is ready to
accept it, but all the education in the world is
not going to change things quickly, it will
take time.
Bailey: The whole of the financial services
industry sent their best and brightest to
China to talk about all the great things they
could do to support investing overseas, while
investors really just wanted to put their toe in
the water. We have to, as an industry, work
out that you need to take baby steps when
you first go into something new. You don’t
buy a Ferrari the first time you buy a car. The
Chinese will move into and buy complex
products quicker than other countries have,
and that’s the sort of trend that we have to
watch for.
McLaren: From an incentive
perspective, you’re not paying any more or
any less depending on what product it is,
unless it’s successful. So the vested interest is
that they [fund managers] raise assets, and
there are all sorts of ways of doing that.
Chris made a good point that there has to be
32-39 roundtableASPTSnf:Layout 1 28/5/10 16:32 Page 37

an equilibrium point of how many products

can actually be for sale in a given market.
Hong Kong currently stands at around 2,000
SFC-authorised funds. In India, you have the
top five fund managers in the market that
have already reached scale, but new
managers are still going in.

Funds Europe: Asset service providers

have a thought-leadership role to play for
their fund management clients. What, in
the panel’s view, are the key regulatory
themes affecting fund managers in the
Asia region, whether to do with market
infrastructure or social/economic policy,
and will these facilitate fund
management?

Singh: We have been discussing the

investor protection issue and that’s really
been the theme to look at in the region over
the last 18 months. A lot of the changes we
have seen across markets have focused on
this subject. Regulators have generally
adopted a wait-and-see approach with
regard to further liberalisation – focusing
more on the issues that have emanated from
the crisis. Some initiatives have been put on
hold while others, such as the Korean
Capital Market Consolidation Act, have not
really taken off yet. This was expected to be
the next big bang in the Korean market after
the banking reforms, with a focus on
encouraging innovation and flexibility, but it
didn’t really have the desired impact because
of the market environment, and it still hasn’t
really picked up. They have also been keen to
develop the onshore hedge fund industry
following the Capital Market Consolidation
Act, which has been delayed and some
action has commenced only recently. We
have seen some relaxations on cross-border
investment and cross-listings, which have
resulted in increased flows. Otherwise it’s
been relatively muted.
Chan: Having lived in Seoul for about a
year and a half I have seen all those different
regulations in play. But when it’s too
complex, it just confuses the investors and the
regulators. In the case of Korea, for example,
the regulators there are realising that
protection is greatly needed but if too
extreme, it can be too difficult to implement.
Nelson: You mentioned the Mas discussion
that’s been going on recently. This is
‘The Mas discussion is a
very useful turning point
for the rest of Asia,
because what Mas ends
up implementing will be
watched by regulators
around the region’
probably the first time, post-crisis, that any of
the regulators have taken a step back and
considered what they want to do going
forward. They are almost starting with a
blank sheet of paper and building it up from
scratch. The timing of this is consistent with
markets opening up, for example you have
more QDII funds and the Korean market is
opening up. The Mas discussion is a very
useful turning point for the rest of Asia too,
because what Mas ends up implementing is
going to be watched by regulators around the
region. Other regulators may not
immediately match it but it will inevitably be
some kind of benchmark for the region. It’s
going to drive a lot of the regulators to
answer a lot of the issues that have been
kicking around on the risk side for the last
two years.
Bailey: I wouldn’t want to be a regulator
right now because they are trying to solve so
many different things. They have the investor
protection aspect, and then they have to keep
up with what is happening in other countries
and how that will affect their domestic
investors. For example, if the US does
something that’s going to affect Koreans
wanting to invest in US products, they also
need to consider what they want to do for
their own domestic industry, like introducing
taxes on offshore funds in Korea. It’s very
difficult for them to explain each aspect of
the changes that they’re trying to make and
the reasons behind their decisions.
Ryan: You can see the potential for more
Korea-style regulation. In Taiwan, for
example, over the last twelve months,
offshore funds represented over 50% of the
whole asset management industry for the first
time. Ten years ago, this was at around the
30-33% mark and it was fairly consistent for
a long period of time. Now, because of low
nominal returns on local bonds, which have
been at 2% or below for six or seven years,
money is swinging into these offshore bond
funds. Just looking at the number, it would be 
natural to question how an Asian country

37
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ROUNDTABLE

can have more than 50% of its fund assets

offshore. The government must be thinking,
‘How do we slow this down?’ But the
momentum is not really stopping. The
overall fund industry in Taiwan has only
been growing by about 5% for the last six
years and investment returns have only been
growing by about 5%, which is not that high.

McLaren: They [Taiwan

regulators] do lift the foot off the pedal on
fund approvals from time to time, so when
they start to see that it’s reaching a point
that’s accelerating too fast, they slow it down.

Ryan: You’re right. In Taiwan authorities

do lift the pedal in terms of new fund
approvals, but they’re not overly sensitive to
the issue around the bond funds.

Chan: The bond fund crisis in Taiwan ten

years ago scared people away with the
valuation problems they had. But to Chris’s
point, in Taiwan it seems that new funds are
being launched every month, but actually it’s
the same money coming back in. Every time
they launch a fund, even though it’s open-
ended per se, people buy them for two or
three years. When the fund gets to be a small
size it closes and another one opens up.
There is a lot of churning going on.
Durand: That could be the solution for the
Taiwanese regulator actually: they could
forbid front-end load fees that are paid to
distributors. If they do this, there would be
nobody to sell these funds anymore.
Singh: True, but that is not necessarily
successful. We have seen India do that just
last year, where they put a ban on front-end
load fees with servicing fees directly being
negotiated with investors based on the service
rendered. All this did was push the
distributors to more lucrative products which
got them higher commissions. It resulted in a
sharp drop in flows into the fund market. So
I am not sure that is the solution to the
problem. Maybe in the longer term it could
pan out well for the industry, but that’s yet to
be seen.
Ryan: Tax was the thing that Korea used
with the offshore funds. If you look back at
2007, all of a sudden offshore funds went
from nothing to about 20% of the industry,
and they had to slow things down. Tax was
‘The Taiwanese
regulator could forbid
front-end load fees that
are paid to distributors.
If they do this, there
would be nobody to sell
these funds anymore’
the only weapon that they had in their
armoury that worked.
McLaren: There are ways around
this as well. Looking at markets where you
can’t directly register offshore funds, for
example. Many fund managers set up a type
of feeder structure, and the money ultimately
goes offshore anyway.
Singh: That is what is happening in Korea
after the tax benefit was abolished at the end
of last year. We are seeing increased
momentum on setting up funds feeding into
Luxembourg Ucits funds post expiry of the
tax incentive.
Bailey: It depends on the regulators’
motivation and overall objectives; do they
want onshore fund managers and onshore
physical presence? It’s not a new dilemma.
Australia effectively quashed offshore funds
and set up their own industry and now it’s
one of the broadest and most comprehensive
fund management industries in the world.
Singh: That is the challenge the industry
needs to take up; to look at what incentives
are required to build an onshore industry. For
example, why are Korean asset managers
registering Ucits in Luxembourg to sell back
in the regional markets such as Hong Kong?
This seems to be one of the few ways, and
possibly the easiest way, for them to get a
license to sell funds to Hong Kong investors.
Something needs to be done to address this.
Ryan: Australia is a good example. Back
in the early 1980s, every overseas asset that
any Australian superannuation pension fund
member was invested in was managed in
Australia. Before this time, there were no
overseas managers in Australia. Then it went
completely the other way. By around 1995
there were maybe one or two local managers
left and the money went totally to overseas
managers. Today you’ve got 150
international managers selling their
international products. But there’s also a
price to pay for what Australia’s been
through; Australian investors are incredibly
conservative with their overseas exposure –
it’s global equities, Aussie equities or nothing.

38
32-39 roundtableASPTSnf:Layout 1 28/5/10
McLaren: That’s because up until
recently there has been about 15 to 20 years
of very strong performance in Australian
equities, so they didn’t need to go anywhere
else. If you look at the Taiwan example, there
was probably a need to look outside of the
home markets for diversification.
Ryan: It’s a self-reinforcing situation – if
you don’t have money flowing into the
domestic economy then the returns won’t be
there, and vice versa.
Funds Europe: I was speaking to a
fund manger who said that when their
clients want to take higher risk they tend
to go not into complicated products, but
more into higher volatility funds. But is
there, nevertheless, an appetite for
complexity?
Ryan: In the wealth distribution markets
in places like Hong Kong and Singapore,
there are very few people with a lot of
money, so that’s the private banking market.
So from the private market there is an
appetite for complex products, but not in the
retail segment. The most complex products
in this market were these structured products.
McLaren: One area where you
could see an appetite for structured products
is if these products sit under some form of
theme – when there is a trend towards a
theme that’s popular. Hong Kong has had a
series of themes over the years that have
been very popular and there could be some
form of structuring to be done under that.
But how would any investor understand what
a sophisticated derivative product actually
does for their portfolio, in terms of risk
aversion or risk loving, and where does it sit?
I wouldn't be able to tell you. I could tell you
where cash, which is supposed to be low risk,
sits and that equities sit up the other end, but
a structured product? No idea.
Singh: If you are looking at products,
from a regulatory perspective, pensions is an
area in which we are seeing a lot more
activity. Korea, Taiwan and India are
demographically diverse and large markets,
where the pension sector is opening up.
Regulators are moving towards greater
involvement of private and foreign fund
managers in some of these markets which
provides an opportunity for the industry as a
16:32 Page 39
whole. Along with such emerging markets,
the maturity of the Hong Kong and
Singapore pension markets can also provide a
real opportunity for further growth of the
fund management business in the region.
Bailey: Hong Kong and Singapore have
very different dynamics to the majority of the
other Asian countries, due to their relatively
small populations, and so they have to invest
outside their domestic markets to get diversity
of investment choice. There is a trend for
more onshore investment vehicles being
launched that have international exposure,
which will mean a demand for onshore
administration services.
Singh: Given that this is retirement
money, regulators are that much more
cautious in some of these emerging markets.
For example in India, they have very tight
investment restrictions including very limited
exposure to equities. This makes it
‘One area where you
could see an appetite for
structured products is if
these products sit under
some form of theme
that’s popular’
challenging to manage such portfolios
efficiently. It will most likely be a very
gradual, phased approach towards opening
up, because it is retirement money
and regulators are quite wary of risk in
the portfolio.
Ryan: They’re also very aware of what
happened historically. They have the
advantage of being able to study history.
Looking at Japan as the example of the first
Asian country that really emerged in modern
times; in 1968, the yen was 400 to the US
dollar, and the Nikkei went through 1,000 for
the first time. Oddly enough, the Dow Jones
also went through 1,000 in the same year.
Today, both the Dow Jones and the Nikkei
are around the same, 10,000 to 11,000, that’s
pure coincidence but the currency is very
different, it’s trading at 80-90 yen per dollar.
Compare the Japanese investor taking
Japanese yen and investing it in the US
market, which went up by about the same as
the Nikkei, to the American investor taking
their US dollars in 1968, 42 years ago, and
doing the same thing. The results are
completely different because you’re on the
wrong side of the currency trade.
So when India and China are looking at this
piece of historical data they realise that the
Japanese investor made money, but they only
made a quarter of what the American
investor made. They’re aware of this and it’s
a very important currency dynamic. Over the
longer term, they expect their currencies to
39
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ROUNDTABLE
rise and so you’ve got a very strong headwind
for investing outside these emerging markets.
What they’re looking for are assets that are
more correlated to emerging markets, like
commodities, and other emerging markets,
Africa and places like that.
Singh: While Asia has been relatively
muted in terms of regulatory activity and
more focused on investor protection, events in
the EU are being watched closely. Obviously
the most controversial of these is the AIFM
directive and its possible impact on Asian
managers. The third country marketing
restrictions could impact Asian managers and
on the flip side, fund managers are looking to
move or are already moving towards
domiciles like Hong Kong and Singapore
because of what’s in the proposals. From an
asset servicer’s perspective, the most worrying
aspect is obviously the Clause 17 relating to
depositary liability. The longer-term impact
of such measures on Asia remains to be seen.
Funds Europe: Is there any evidence
for European managers looking to base
themselves in Asia?
40
16:32 Page 40
Singh: Yes, we have seen reports that
indicate some are already considering
moving offices to jurisdictions such as Hong
Kong and Singapore while some are
considering Switzerland.
McLaren: I wouldn’t underestimate
the tax aspects of that either.
Chan: It’s fair to say that a lot of the
bigger global managers are already out here.
We’re all servicing them one way or another,
so I don't think any regulation is going to
push them out more but maybe the smaller
‘For established managers,
the product mix is
changing radically: from
just recycling European
products into Asia, to a
much more tailored,
local approach’
managers are now thinking about coming
out this way.
Nelson: For a majority of the more
established managers, who have been in Asia
for some time, the product mix they’re
offering is changing radically: from just
recycling European products into Asia, to a
much more local approach, tailored to local
investors and markets. I remember chatting
with a couple of the major asset managers,
who have been on the ground offering local
products for a long time, and they underlined
the strong barriers to entry in the local
markets – which have the effect of keeping
new entrants out. While you can turn up in
Hong Kong and start working the market
quite quickly, in the rest of Asia it’s very
hard to just pitch up and launch local funds
for local distribution.
Funds Europe: In the Australian
model, was it the pensions market that
really created the asset management
industry and is this the model the Asian
region is hoping to follow?
Ryan: There are three dynamics going on
in Australia. Firstly tax is very high
compared to the rest of the Asia/Pacific
region. Second, prior to 1985 there was no
universal pension, it varied from company to
company and a lot of it was defined benefit.
It wasn’t until 1985 that the industry fund
movement came to prominence. Regarding
the tax aspect; in the beginning the
compulsion was low but the tax advantages
were very high. Effectively, the government
was paying half your contributions, so why
wouldn’t you do it? Even before 1985,
Australian authorities changed the taxation
rules to make it very attractive to foster those
kinds of savings. At the same time, you had
the entry of foreign companies to the
Australian market and the 1983 change to a
Labour government. The floating of the
Australian dollar made a big difference and
approximately 30 foreign banks came into
Australia and brought their asset
management units and securities companies
with them. That really got off to a very rapid
and high-momentum start during the early to
mid-80s.
Bailey: Australia needed those incentives
to get people to save because the Australian
psyche was ‘buy your own your home, live
32-39 roundtableASPTSnf:Layout 1 28/5/10
the dream’. Asia’s population however has a
higher savings rate, so it’ll be interesting
when the pension fund industry develops
across Asia.
Funds Europe: To what extent is
outsourcing accepted and recognised by
institutional investors? Is third-party
asset servicing for these clients still only a
nascent industry?
Durand: I’m not sure that Asia is really
different from the rest of the world when it
comes to outsourcing. The investors need
transparency and what we, as an asset-
servicing provider, can offer is that
transparency. We can give independence and
help the asset managers go to their investors
and their clients and say, ‘look, we are not a
black box, we have people who are experts in
their fields and they can give you
information’. Basically it’s like having an
auditor: you want to show that there are
people looking into your products, having an
insight into them. In general it will allow you
to tell your investors that your product is safe,
that you are not a fraudster.
Funds Europe: To what extent will
local pension funds, where they exist in
this region at least, outsource their back
and middle office operational
requirements and how much of your
services will they require? Also, will
Chinese fund managers coming to Hong
Kong use your services?
Singh: Outsourcing in Asia is still
relatively nascent and evolving; unlike in
Europe and the US where it’s a lot more
mature. We are seeing different stages of
evolution across markets, for example Hong
Kong and Singapore are a bit further ahead,
while India and Malaysia have picked up
over the last four or five years. A country like
Taiwan is still in the early stages of
outsourcing. If you look at the local
managers, one of their key considerations is
cost. The general perception is that
outsourcing will reduce cost, but this is not
necessarily the case in the region. Many
managers have in-house operations and
manage with very low cost structures. When
they go to a third-party provider, they find
out that it works out to be more expensive
than what they’re doing in-house, so
why should they outsource? What is very
16:32 Page 41
often missed out is an appreciation of
operational risk which also gets transferred
to the provider.
Funds Europe: Do local managers
have the necessary expertise in-house or
has this crisis driven them to look outside
of their business?
Singh: When local managers have
offshore investments, which they cannot
handle internally, with a local platform,
those are automatically outsourced.
However, this is not always the case for local
investments, especially in the more emerging
markets, since they very often have the
platforms and infrastructure internally. How
robust and how scalable these internal
structures are is a question to be asked. But
the perception that it could be more
expensive going outside is what becomes the
decision point very often, avoiding other
considerations of outsourcing benefits. The
other related issue is in terms of who bears
the cost; in most markets the fund bears the
cost but there are some markets where the
manager bears the cost – like in Taiwan and
India. If they are bearing the cost and
outsourcing it will drive this up further, it
does not bode well for the case of
outsourcing. However, we are seeing
increased momentum towards outsourcing,
especially with start-ups who are more
inclined towards outsourcing rather than
setting up infrastructure. This trend is
also being reinforced by regulatory and
investor pressures.
Nelson: Outsourcing is a pretty broad
church. For example, outsourcing custody
compared with outsourcing your middle
office is a very different discussion. In Europe
and the United States the key drivers for
outsourcing are around risk management
and controlled transparency. In Asia, the
fundamental reason why people outsource
has more to do with the managers either
going international or being on an aggressive
growth path. This is mainly because it is
more expensive to outsource than to handle
these operations in-house. At the end of the
day, the more you outsource the easier it is to
just bolt on new mandates, new portfolios.
Volumes can shoot through the roof during
good times in Asia, and managers need to
think about whether they can handle that
internally. The whole outsourcing trend is
still nascent in Asia: people don’t yet trust it
enough. We mustn’t overlook the cultural
considerations as well of outsourcing: as we
need to make sure that people understand the
true benefits, rather than being seen as
admitting that there is someone that can do it
better than them.
A good example is Chinese asset managers
who are just entirely focused on growing
quickly and for them outsourcing is brilliant
because there’s no legacy. It’s global best
practice and it’s just a very quick path to
growth. I would say those guys are probably
exceptional.
Ryan: The Chinese fund managers are not
very interested in high levels of fixed cost and
subsequently don’t want to increase the risk
coming to Hong Kong. In other words,
establishing a Hong Kong pressence that
might go wrong with 100 people is a big
decision for them. Also, I know from my
previous role in the fund management
business that over the last two years, people
have figured out the ramping up and ramping
down in certain markets. In Korea, Japan and
Hong Kong, it’s extremely expensive to ramp
up and ramp down, so if you do a lot of
business one year and you haven’t got much
the next year, the transition cost is very high
and people have been here long enough to
understand that. So now we’re seeing some big
fund managers who used to do it in-house
beginning to outsource.
McLaren: It’s also market
dependent. In Taiwan a fund manager is
allowed to launch something like four or five
funds a year. Similar to what happens in
China, during the first couple of weeks you
need to employ an extra 20 or 30 people to
process all your transactions. Then, when that
demand drops off you either have to get rid of
them or redeploy them. Apart from HSBC
and one other, there isn’t any outsourcing in
Taiwan and there hasn’t been that collectivity
of the variance in demand for resources. So it’s
very market specific.
I agree that outsourcing is nascent in Asia and
you get fund managers at either end of the
continuum; some of them will just stay very
lean and say ‘we don’t want that fixed cost, you
do it because we know you do it everywhere in
the world’, but at the other end of the spectrum
there’s this element of trust. It’s not unheard of
that as an internal back office is reluctantly
handing over some of their fund accounting,
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ROUNDTABLE
they’ll continue to shadow it for the next year or
two years or five years, to make sure you don’t
make any mistakes. All things considered, like
full internal costs, system investments and
global best practice, in 90% of the cases the
outsourcing solution is a better one, if a well-
established global player is selected.
Durand: Asset managers that have their back
and/or middle office in-house may think that
outsourcing is more expensive, but that's really
if they don’t look at all the costs involved.
Sooner or later, they won’t have the choice,
they will have to outsource, even if, at first, it
appears more expensive. Not because of
regulatory pressures but because of pressure
from investors.
If you are a pension fund, you want to trust
the fund you are invested in; if the fund is
doing all his middle office in house, if he is
pricing his OTC, how can you trust that? You
can’t. What if there is a small fund with three
people in the middle office: what happens if
one resigns and one is on holiday? You need
solutions and you need a structure. In the end,
the advantage of outsourcing will be clear to
them as well.
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16:33 Page 42
Singh: The other issue that also plays a part
in the decision making process is flexibility.
Whenever a fund manager who has been
managing the back office in-house for a number
of years suddenly has to outsource, there is a
perception of loss of flexibility and control on
the operations, whether it is to do with
deadlines, procedures, etc. A mindset change is
required for the managers who carry a huge
amount of legacy of an in-house operation and
need to adapt to a new environment. This is
especially true for the local managers. It is
obviously a lot easier for a start-up where you
start with a clean slate.
‘If the fund is doing all
his middle office in
house, if he is pricing
his OTC, how can you
trust that? You can’t’
Bailey: Local managers are the biggest
challenge. It’s harder to do the middle office
of a Korean domestic fund manager
anywhere other than Korea, so there isn’t a
lot of scale there. A lot of the global fund
managers want to go to Korea or Taiwan
or Malaysia.
Nelson: Regarding the loss of control and
loss of agility, we benefit from being very
innovative and fast moving in a lot of
the markets that we’re in. Then you’ve
got the juxtaposition of that with the
internal culture.
Funds Europe: How should fund
managers choose a fund domicile and
fund centre for their asset servicing
needs? To what extent are funds required
to be serviced in the same country as their
legal domicile? And would an offshore
strategy, like Luxembourg, for a fund
manager building a pan-Asian business
be favourable?
McLaren: We look at the world
with a significant presence in Europe and
obviously domiciles like Dublin and
Luxembourg are very important. Looking at
Asia, the distribution of those products is
very important for countries like Hong Kong,
Singapore, Taiwan and others, but there’s
one offshore domicile that’s often not
overlooked but maybe underlooked, which is
Cayman. Hong Kong and Japan have a very
long association with Cayman and as such,
Cayman offers the ability to service outside
of the jurisdiction. While Luxembourg and
Dublin have various rules and regulations,
Dublin has a minimum activity requirement.
Luxembourg has a central administration
requirement that not all functions, or maybe
no functions, can be done outside without
derogation. This is why, for Asia, Cayman
has been successful.
Across this industry a lot of specialised
Cayman lawyers are operating in the market,
all of the audit firms and the majority of
asset servicing funds can service a Cayman
fund from here with maybe nothing more
than a brass plate in Cayman or a trustee
licence. If you were building a business in
Asia and starting from zero, you would have
to consider taking the Ucits route. It’s not
necessarily always the answer but it’s
probably the most established for selling back
into major markets. Looking at other Asian
32-39 roundtableASPTSnf:Layout 1 28/5/10
domiciles, the onshore funds industry in
Singapore seems actually to be shrinking in
favour of the offshore products. So global
fund managers say, ‘why should I have a
product in every single market and have to
set up either a feeder structure or a domestic
home grown fund, when all it is is my global
equities portfolio, why can’t I just set it up
once in one dominant location and sell it in
as many countries as I can around the
world?’ That’s certainly the argument for
scale and cost that we see evolving in favour
of Ucits.
Bailey: This kind of consideration is also
of benefit to the investor, in theory, not just
the fund manager.
Nelson: Ucits funds are not going anywhere
for a while. They’re the status quo. The only
thing that possibly will change this is the
advent of Ucits IV. Ucits is still a designer
label in Asia, it’s still the route most
traditional fund managers will take,
excluding most hedge funds. Within Europe
though, competition is warming up in term
of fund domiciles. Jersey is now actively
canvassing in Asia at the moment, so there
are other potential changes in the pecking
order. The Luxembourg rules are currently
quite constraining, given the close oversight
that must happen from within Luxembourg
today. We believe that there will be an
increase of competition on the European
16:33 Page 43
‘We’re in the throes of
Ucits IV, which does a
couple of things. It
creates the ability to do
cross-border mergers
within Europe, but it
could also drive business
away from Cayman’
side, which will help people in Asia to
actually pick a workflow that suits their
needs.
Singh: Traditionally, providers have been
located in the same domicile and there are
markets where there are regulatory
restrictions while there are some others, like
Singapore, that offer tax incentives if your
provider is in the same jurisdiction. However,
this is changing quite rapidly and regulators
also appreciate the fact that the basic core
servicing can be done as well, if not better, in
global centres of excellence, as long as there
is some control and review in the local
domicile. It is becoming more and more
decoupled with the domicile of the fund.
Durand: There’s also the fact that the Ucits
funds are strong in Singapore, Hong Kong
and Taiwan, but the two major markets,
which are Japan and China, don’t know these
funds at all. So using these Ucits funds to
come to Asia is a good start but if you stop
there, your business is limited.
McLaren: We’re in the throes of
Ucits IV, which does a couple of things. It
creates the ability to do cross-border mergers
within Europe, but it could also drive
business away from Cayman. For example,
Malta could be a European domicile; it could
be the next Cayman of Europe, but now
I’m maybe being provocative.
Bailey: From the funds perspective, there’s
this whole Asian culture where they like
onshore funds, or at least their regulators like
them. If they had a choice to have a fund
with the same investment profile regulated in
any of the countries you just mentioned or in
their home country, they would probably go
for their home country. All the funds are
trying to do is create something that has the
transparency to make the local regulator
happy but so they can still have scale. fe
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TALKING HEADS

‘A shift from West to East’

We questioned executives in Asia about their outlook for the industry in the
region. We asked them whether they think more managers will be opening
Asian offices and what regulatory and client-driven trends can affect the
business, both onshore and offshore

BHADRESH P SONI
CEO, ASK INTERNATIONAL
“The question of whether managers will be opening portfolio
operations in Asia is a highly subjective matter and has to be dealt with
in the context of relative size and scale of operations, quantum of
assets under management, diversity of investment themes and
circumstances specific to each investment fund or manager. However,
if you consider the landscape, most high-street names have presence in
either Singapore or Hong Kong and to this extent already have some
footprint in the Asian markets. At the same time, it’s not uncommon to
find managers managing sizeable sums in emerging markets with an
Asia focus, appointing a senior analyst or a manager to the region to
obtain on-the-ground experience and get a feel for the portfolio
companies from time to time. Going forward, as we see a shift
from West to East, this trend can only accelerate as markets such as
India and China provide superior growth and sustainable returns over
the long term.
While we believe a lot of offshore jurisdictions are well regulated and
may continue to attract new managers and assets, there is a sector of
investors that insists on a more stringently regulated onshore
jurisdiction. A couple of fund houses we know have recently moved
their offshore funds activity to onshore jurisdictions in the European Union, seemingly driven both by client objectives and a larger public
perception of them having a better regulated status, among others. But, of course, one cannot generalise. Each situation needs to be examined
within each individual fund house context.”

‘Strong economic growth in Asia has pushed many managers to relocate’

ANTHONIA HUI
CHIEF EXECUTIVE OFFICER
AL WEALTH PARTNERS
“Media and market talks, recent regulatory practices, threats
and tax increases made by EU and USA governments, and
strong economic growth and wealth in Asia have pushed many
managers to relocate to either Switzerland or Asia.
Singapore has established itself as a leading wealth
management centre over the last decade. Most recently it
presented a consultation paper for the industry to comment on
the best practice for the fund management industry. It will
continue its prudent approach and maintain a conducive but
proper operating ground for those that respect and practice
with integrity.”

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‘With most Asian countries having strong foreign reserves and the increased need to
diversify investment options, there are growing demands for offshore products’
ROLAND TEO
DIRECTOR OF BUSINESS DEVELOPMENT
ABSOLUTE ASIA ASSET MANAGEMENT
“In the past year, there was an increase in investment in Asian capital
markets. However, the majority of managers are still maintaining
investment teams in their home country, but their Asian analysts travel
more frequently to Asia to do their research, either to carry out direct
investments or to select managers or funds. We see a minority of firms
establishing research offices in Asia – usually in Shanghai or Singapore
or both. For example, the Norwegian sovereign wealth fund is opening
its second office in Singapore after opening its first office in Shanghai
two years ago. Also, increasingly, institutions such as private banks and
funds of funds have transferred the fund manager selection function for
Asia investment to Asia itself, so that they can be closer to the ground.
Some firms chose to transfer the team to Singapore, such as Credit
Suisse Private Bank, while others merely appointed a local team.
In Asia, different countries are at different stages in their development
of the mutual fund industry. While there are fund registration regimes
already in place in certain countries such as Singapore, Hong Kong and
Taiwan, it is difficult for offshore products to be sold in most other Asian
countries. Many countries implemented exchange controls after the
Asian crisis, partly over concerns that offshore investment might hurt
their currencies. Today, with most Asian countries having strong
foreign reserves and the increased need to diversify investment options
for reserve and pension money, there are growing demands for
offshore products.”
HARSHENDU BINDAL, PRESIDENT,
FRANKLIN TEMPLETON
INVESTMENTS INDIA
“We believe superior risk-adjusted returns
are only possible through a fundamental
and bottom-up approach to investing and
this requires investment professionals being
stationed in various locations across the
globe. This also helps in having a
comprehensive research coverage across
market cap ranges and sectors, instead of
being limited to the large-cap stock
universe (benchmark driven) used by
investors adopting top-down, quantitative,
passive styles.
Also countries like India, which have a large
population, regulatory restrictions and
growing demand for financial services, would
require a strong onshore presence. We have
always believed in a ‘think global act local’
approach, which helps us leverage our global
investment strengths in an appropriate
manner to meet local financial needs.”
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