Making the most of the Asian funds goldrush
By Mark Neary and Phil Cook, Milestone Group
For retail funds, Asia is a prospective gold mine. A brief glance at the headline figures goes a long way to explain the explosion of interest. According to figures issued by the National Mutual Fund Associations, the region has approximately 13 percent of global funds under management, but 60 percent of the world’s population. Its middle class has increased by 25 percent in the past 20 years (Asia Development Bank), matched by rapid growth in GDP. And, as noted by the World Bank, at 10 to 15 percent of all working age individuals, pension coverage is still significantly lower than that seen in the US or Europe. This is a market with a low starting point but huge potential.
The emergent middle class is driving demand for pension funds, and both Singapore’s Central Provident Fund (CPF) and Hong Kong’s Mandatory Provident Fund (MPF) are likely to be replicated across Asia, albeit at various speeds and at various levels of contribution, over the next decade. At the next level up, more and more individuals are engaging with investments via premier level banking relationships, and as the number of high-net-worth and ultra-high-net-worth individuals in the region continues to grow, so too does private banking.
If we look behind the headlines, the picture is more complex. In real terms, the target market beyond the 1.4 billion in mainland China is tiny. There are fewer people living in Hong Kong than in Greater London and of those, less than three million work full time. The absolute amount of money in the MPF is very small. It is even smaller in Singapore: the city-state may be able to boast more millionaires per square foot than anywhere else on the planet, but it still only has a small number of square feet to count. Savings rates, as a percentage of income, are far higher in Asia than anywhere else; but that doesn’t negate the fact that average income is still significantly lower.
Ultimately though, the market has huge potential, and that is why retail fund managers – and their distributor partners – have been staking their claim across different countries to solidify their position for the future. Much of this activity has been acquisition or joint venture based, with banks acquiring branch operations or even entire institutions as a quick route to securing the necessary licence to operate.
The acquisition spree has created a situation where in many cases a single institution will have in place multiple platforms, multiple core banking systems and even multiple private wealth systems with uneven coverage over numerous countries. Add to this the fact that levels of automation are often very low and the opportunity for leverage can be seen as less compelling. Given that the end game of the acquisition strategy must be scalable growth, the arguments to establish a streamlined operational foundation are very compelling.
Looking the other way, growth in the overall Asian economy shows signs of coming off the spectacular highs of the past decade, and the prospect of downward pressure on margins is also driving demand for greater operational efficiency. The current climate accelerates the need for businesses to be operating as efficiently and flexibly as possible, to mitigate the danger from potential revenue shocks.
Managing an array of disparate systems is a significant barrier to the creation of lean, streamlined and efficient funds processing operations. It is also precludes true scalability where unit costs decrease proportionally and predictably in line with volume increases. Without scalable systems infrastructure, increased revenues are simply matched by increased costs.
There are more immediate drivers for streamlined and efficient operations too. For example, the industry is starting to see funds look at real-time reporting of deal and rebate capture as a means of improving intelligence on their distribution arrangements and enhancing their position for negotiating rebates. Custody arrangements are also being seen as fertile ground for margin improvements, with funds looking to replace multiple custody arrangements across the region with centralised booking capabilities. Again this improves negotiating position, which helps control costs, but it also reduces the number of nominee structures involved, meaning there is less to reconcile and process. However, if these types of efficiencies are to be achieved, then funds themselves will need to centralise internal booking controls, exception management and other essential back-end processes.
However, cost control and financial efficiency are not the only concerns for funds operating in the region. The Asian markets might be experiencing a land grab, but they are not immune to the growth of national and international regulation that characterises global financial markets. Growing demands for transparency and the availability of data in a timely fashion are driving middle- and back-office automation in Asia just as it is elsewhere.
What makes this a particularly Asian issue, however, is the value that is attached to a strong brand – to the point that it can outweigh performance in the retail investor’s decision making. The financial consequences of incorrect fund pricing or transactions entering the system thanks to manual error, and then being replicated across multiple funds and multiple investors, can be huge. While financial losses can be significant, damage done to reputation and potentially funds inflows, is both time consuming and expensive to repair.
At the same time, the traditional means of managing rapid growth – the deployment of relatively cheap labour – is becoming less readily available. This is something of a circular problem. Higher costs of living are driving up labour costs in more sophisticated markets. Qualified, experienced staff will also arbitrage any wage differentials, creating a high staff turnover. Without strong, automated processes, dependence on single individuals is much higher. It is also potentially destabilising – further enhancing operational and reputational risk.
In any gold rush there will always be prospectors who come back empty-handed, having spent a great deal in the process. Retail funds and fund distributors have staked their claim in Asia’s high-potential markets; now it is time to ensure they have the tools, the processes and the operational strength to turn a ‘gold strike’ of new business in Asia into a long-term and profitable reality.