Local nuances, regional and global regulations, as well as multiple languages create a very unique landscape for investors examining the Asian marketplace. We recently sat down with Yoon Ng, Asia Research Director at Cerulli Associates, to discuss the current trends and challenges across Asia and what makes the region such an attractive market.
Q: What are the top retail trends you are seeing across the Asian asset management industry?
A: The Asian asset management industry is experiencing growing diversity across its distribution channels, including the introduction of online platforms in China and Funds Online Korea, an industry-owned platform to sell mutual funds online and support smaller, independent asset managers. Additionally, investors are continuing to explore further into the opportunities provided by the Asian Regions Funds Passport, which is scheduled to commence in January of 2016. This opportunity grants customers’ access to investment products outside of their current jurisdiction while simultaneously benefiting the participating regions by allowing a greater number of funds to be domiciled within it. There is currently very low penetration (10.4 percent as of November 2013 according to our research) of cross-border funds across Asia, which is likely attributed to the low acceptance rate of this practice across the region. There has been an increase of regulatory measures, such as tax incentives, which aim to encourage growth in Asia’s onshore fund marketplace and to varying degrees, create disincentives for offshore fund managers.
Q: What institutional trends are you seeing and are any of these similar to retail trends?
A: On the institutional side, there has been a shift to deregulate this market in order to allow these organizations to invest overseas and in a wider array of asset classes. These actions have opened up new opportunities, particularly in insurance. For example, regulations in 2013 opened up a broader range of investment alternatives for insurers in India and approved asset classes for insurers in China to be expanded from equities and bonds to real estate, currency products and other areas of fixed income. These initiatives are notably different from the retail space, given it is much more favorable for foreign managers. The institutional space is also witnessing a hunt for yield and there is growing interest in alternative investments, which has shown significant increase in allocations since 2009 in portfolios recorded. This change has also been true to a certain extent on the retail side, but is not as prominent. Outsourced and investable assets have also produced strong growth for institutional investors, with the highest percentage of outsourced investable assets coming from Hong Kong in 2013, according to Cerulli research.
Q: What is driving these developments?
A: For the retail investors, regulators’ evaluation of how to grow the local fund industry by injecting diversity into the market and creating a more sustainable growth environment is driving these trends. On the institutional side, the unique investment opportunities that not only produce yield, but also meet market liability matching have been a catalyst of change in the sector.
Q: What makes Asia such a unique region in terms of the financial markets and the regulatory landscape and how have the regional nuances impacted cross-border growth opportunities?
A: The Asian markets are largely independent of one another, with different regulatory and tax regimes, as well as languages and specific investor needs unique to each country. Due to this divergence, cross-border fund penetration has remained largely stagnant and strongholds have been established in prominent markets such as Hong Kong, Singapore and Taiwan. Direct offshore funds are currently not allowed in China and India, as well as many countries in Southeast Asia.
Q: What are the top opportunities that lure investors to Asian markets and what are the top challenges faced there?
A: Investors are recognizing the desirable qualities in Asian markets, such as a long-term growth opportunity for investments, increase of gross domestic products and rising wealth levels across the region. However, investors must also take a number of challenges into consideration before entering these markets. These regions can be highly volatile and the regulatory framework may not be robust enough to support the slew of financial liberalizations that are being introduced. As the number of new opportunities supporting growth across Asia continues to mature, investors will be closely monitoring the impact of both the benefits and challenges to further educate their investment choices.